The rental income for mall operators is expected to grow by 9-10% YoY in FY2024 and 8-9% in FY2025, driven by healthy occupancy levels, estimated growth in trading values and rental escalations, according to an analysis by ICRA.
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.
The total grade A retail mall supply for the top six markets stood at around 105 million square feet (msf) as on September 30, 2023, and is expected to increase to around 116-118 msf by March 2025. Delhi NCR has the highest supply contribution of 30% followed by Bengaluru (20%), MMR (17%), Pune (14%), Hyderabad (13%) and Chennai (6%), it said.
ICRA expects Delhi NCR, Pune, and Hyderabad to account for 85% of new supply in FY2025. Around 10% of the upcoming supply in FY2025 is pre-leased as of September 2023.
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Across the top six cities in India, new supply of 9-10 msf and around 6 msf is expected in FY2024 and FY2025, respectively. Though the net absorption was healthy at 3.2 msf in H1 FY2024, the vacancy levels rose marginally by 100 bps to 20% as of September 2023 due to new supply of 5.6 msf, which has recently become operational and is yet to ramp up fully. ICRA expects occupancy levels to sustain at 81-82% as of March 2024 (PY: 81%) and improve to 82-83% by March 2025.
ICRA’s outlook on retail mall operators is stable
ICRA anticipates the credit profile of the mall operators to remain stable, driven by healthy net operating income (NOI) backed by growth in trading values and rental escalations, moderate leverage and comfortable debt coverage metrics.
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, it said.
“Consequently, 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,” said Reddy.
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In H1 FY2024, rental income for ICRA’s sample set increased by 8.4% YoY.
“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,” said Anupama Reddy, Vice President and Co-Group Head, Corporate Ratings, ICRA.
Spending remains buoyant
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.
The Private Final Consumption Expenditure component of Indian GDP has been increasing over the last four quarters, amidst higher spending by households. As per the RBI’s Consumer Confidence Survey of September 2023, household spending has been buoyant over the last year on the back of higher essential and non-essential spending and is likely to remain higher over the next 12 months, which is expected to support retail sales for the tenants of mall operators, the analysis said.
