When Canadian actor Cobie Smulders sang the covid-19 version of the hit, Let’s go to the mall, it was sadly titled, Let’s all stay home. It was just another reminder that shopping malls will be the last thing on anyone’s mind for a long time to come.
Indeed, a survey conducted by KPMG in India to analyze the evolution of consumer confidence due to the pandemic showed that the preference for online shopping has increased significantly. Across all shoppers willing to brave brick and mortar stores, 67% of respondents said they prefer stand-alone stores over malls.
Against this bleak backdrop, it was interesting that a Qualified Institutional Placement (QIP) by Phoenix Mills Ltd was stoned by investors. the ₹A 1,100 crore issue received offers for five times the number of shares offered. The promoters took advantage of pent-up demand and sold shares worth ₹833 crore at a premium of more than 10% over the QIP price. What explains a mall’s rush for actions at a time when social distancing has become the norm?
“The macro point of view is that India is formally underserved from a retail point of view and quality retail, led by real estate, will see benefits as the history of consumption will unfold, ”says Rachit Mathur, Managing Director and Partner of Boston Consulting Group.
Indeed, the Singapore government, which was the largest investor in QIP, and other institutional investors, bought Phoenix Mills shares at a 35% discount from its pre-covid highs.
“Investors will focus on the potential, not just the current scenario. Shopping malls are a big draw in a country that lacks most of the other means of entertainment that many developed countries take for granted, “says Anuj Puri, president of ANAROCK Property Consultants.” Global capital wants a cake in it. this story of consumer growth – either directly or through partners, ”says Parikshit D. Kandpal, analyst at HDFC Securities Ltd.
In the case of Phoenix, its primary property in central Mumbai is a raffle. While shopping malls, in general, will face challenges, those present in certain key locations and with a proven proposition should do better. “Shopping centers with quality real estate, a solid traffic base, customer experience and maintenance orientation will be an advantage,” says Mathur from BCG. And fundraising will help finance cash consumption for several quarters – cash consumption has been estimated to be ₹65 crore in the June quarter.
But it is clear that investing in stocks of mall companies is not for the faint-hearted or for those with relatively short investment horizons. In the short term, considerable pain is expected. Shopping center owners have a battle on two fronts. On the one hand, fear of the virus keeps buyers away; on the other, lower income levels and increased uncertainty translate into lower discretionary spending.
As a result, shopping center rentals have all but evaporated and the pace of recovery is slow. And given the current financial situation of retailers, the fixed rent component is expected to decline with a shift towards revenue sharing. “As profitability is under pressure and real estate rental represents a significant selling cost, most brands and tenants will seek to vary this cost to manage their P&L,” explains Mathur. “As long as there is a cap on retailer profitability, rentals will remain under pressure,” Puri says.
When announcing its June quarter results, multiplexing company Inox Leisure Ltd said that once operations got underway it was looking to negotiate a revenue sharing model instead of a fixed rent.
It should also be noted that the revenues of shopping centers were under pressure even before the pandemic, with the growing penetration of electronic commerce in the country. This trend has accelerated over the past five months. “The pandemic has motivated consumers to shop online, (with) safety and health being a non-negotiable requirement,” said a memo written by Harsha Razdan, partner and head of consumer and retail markets retail at KPMG in India.
The significant correction of over 30% in Phoenix Mills stock suggests that investors are still wary and unconvinced of the expected post-covid consumer boom; the sale of shares by the promoters of the company is also a bit of an eyesore.
But for long-term investors, this just might be an opportunity to lock in to quality real estate at affordable prices. As Mark Twain said, “Buy land, they don’t do it anymore”.