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ICRA, a credit rating agency, predicts a positive outlook for retail mall operators in FY2024. They expect an 8-10% year-on-year increase in rental income, supported by healthy retail sales and contracted rental escalations. Trading values are anticipated to improve by 4-5% with strong sales in categories such as jewellery, electronics, and apparel, along with increased spending on food, beverages, and entertainment. Additionally, rental rates are projected to rise by 3-4% due to higher contracted escalations and lease renewals driven by healthy mall occupancy.
According to Anupama Reddy, Vice President and Co-Group Head of Corporate Ratings at ICRA, rental income for ICRA's sample set of retail mall operators saw a significant growth of 78% YoY in FY2023. This increase, compared to the lower base of FY2022, brings rental income to levels 25-27% higher than pre-Covid times. The growth can be attributed to higher revenue shares resulting from increased retail trading values and improved occupancy levels. Footfall in malls has reached 90-95% of pre-Covid levels, and trading values have recovered to 125-127%, driven by higher spending per footfall, particularly in premium product categories. The medium-term outlook for retail malls is positive, with higher disposable income and a preference for experiential shopping supporting their growth.
Consumer confidence in India has been gradually recovering from the historic low observed in June 2020. The RBI's Consumer Confidence Survey from May 2023 indicates buoyant household spending over the past year, driven by increased expenditure on both essential and non-essential items. This positive trend is expected to support retail sales for mall tenants.
In the top six cities of India, the incremental supply of retail space in FY2023 reached approximately 7 million square feet (msf), surpassing the net absorption of around 4 msf. As a result, vacancy levels rose to 19% in FY2023 from 16-17% in the previous fiscal years. Despite healthy leasing activity, vacancy levels are projected to remain between 18-19% in FY2024, primarily due to the high new supply of 9-10 msf. The Delhi NCR and Chennai regions will account for around 60% of the new supply in FY2024, and approximately 17% of the upcoming supply in the same year has already been pre-leased.
Reddy added that the mall operators are anticipated to maintain a stable credit profile, primarily due to strong growth in net operating income (NOI), reasonable leverage, and favourable debt coverage metrics. It is expected that the players' leverage metrics, measured by debt/NOI, will show improvement in FY2024, ranging from 5x-5.5x compared to FY2023's range of 5.5-6.0x. Reddy also mentioned that despite the anticipated increase in interest rates, the coverage metrics are projected to remain comfortable at 1.35x-1.4x in FY2024, as opposed to FY2023's range of 1.3-1.35x. This positive outlook is attributed to scheduled repayments and an enhanced level of net operating income.
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