Retail mall operators are in for rental growth momentum in FY2024 driven by healthy occupancy levels, estimated growth in trading values and rental escalations. Ratings agency, ICRA, expects the rental income for mall operators to increase by 9-10% YoY in FY24 and 8-9% in FY2025. In H1 FY2024, the rental income for ICRA’s sample set (which includes 38 malls totalling 25.4 million square feet across 12 states) increased by 8.4% YoY.

With ICRA’s outlook on retail mall operators being stable, Anupama Reddy, vice president and co-group head, Corporate Ratings, ICRA, says, “Retail mall operators witnessed a strong rebound in FY2023 in terms of footfalls and trading values and the trends continued in H1 FY2024. Backed by expected growth in footfalls, increase in spend for footfall driven by premiumisation and strong urban consumption, ICRA projects the trading values to increase by 14-15% in FY2024 and record 10-12% growth in FY2025 on a high base.”

She highlights that segments such as jewellery, electronics, apparels, beauty care products of premium brands, and entertainment witnessed above-average consumption growth in the recent quarters, which is expected to continue in near to medium term with strong consumer demand.

Over the past four quarters, the Private Final Consumption Expenditure segment of India's GDP has seen a steady rise due to increased household spending. According to the RBI’s Consumer Confidence Survey from September 2023, household spending has been robust over the last year, driven by increased expenditure on both essential and non-essential items. This upward trend in spending is anticipated to persist for the next year, potentially bolstering retail sales for the tenants of mall operators.

Up till September 30, 2023, the combined grade A retail mall space across the top six markets in India was approximately 105 million square feet (msf), projected to grow to around 116-118 msf by March 2025, according to the report. Delhi NCR leads in supply contribution with 30%, followed by Bengaluru (20%), MMR (17%), Pune (14%), Hyderabad (13%), and Chennai (6%). In FY2025, ICRA anticipates Delhi NCR, Pune, and Hyderabad to drive 85% of the new supply. About 10% of the expected FY2025 supply was pre-leased by September 2023.

In these top cities, an estimated 9-10 msf and 6 msf of new supply are forecasted for FY2024 and FY2025, respectively. Despite healthy net absorption of 3.2 msf in H1 FY2024, vacancy levels slightly increased to 20% by September 2023 due to 5.6 msf of recently operational new supply that is yet to reach full capacity. ICRA projects occupancy levels to remain around 81-82% by March 2024 (compared to the previous year's 81%) and rise to 82-83% by March 2025.

“ICRA anticipates the credit profile of the mall operators to remain stable, driven by healthy NOI backed by growth in trading values and rental escalations, moderate leverage and comfortable debt coverage metrics,” says Reddy while adding, “The leverage ratio for the malls, measured by debt-to-NOI, is likely to improve to 5.0-5.2x as of March 2024 from 5.5x as of March 2023, with expected improvement in NOI and is likely to sustain at similar levels in FY2025.”

Consequently, Reddy opines, the debt service coverage ratio, which was around 1.25x in FY2023, is projected to improve to 1.35x-1.40x in FY2024 and FY2025 despite factoring in increase in interest rates.

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