Renewed restrictions and localised lockdowns to contain the Omicron variant-led third wave of the Covid-19 pandemic will pare as much 10% off the rental revenue of mall owners this fiscal, compared with earlier expectations.

The credit profiles of mall owners will, however, be able to absorb the shock given relatively faster recovery seen among those afflicted, compared with the earlier waves.

The third wave-led restrictions on malls for the top eight cities are expected to last only 4-5 weeks compared with the median closure of 7-8 weeks seen during the second wave and 13-14 weeks during the first wave.

Furthermore, unlike the earlier waves when malls were shut completely, metros such as Mumbai and the National Capital Region have only implemented capacity or timing restrictions so far in the current wave. This difference in response of state governments, supported by lower hospitalisation rates, augurs well for the malls business this time around, though the capacity and timing restrictions are expected to dampen footfalls and retail sales.

An analysis of India’s top 14 malls¹, rated by CRISIL Ratings, indicates as much.

Says Anand Kulkarni, Director, CRISIL Ratings, “The third wave may restrict recovery of mall revenue in fiscal 2022 to 70-75% of the pre-pandemic level as against earlier expectations of 80-85%. Retail sales in malls had reached ~90% of the pre-pandemic level in the third quarter of this fiscal, supported by a rapid easing of restrictions post the second wave, pent-up demand, and increasing vaccination coverage. While the third wave may delay full recovery, the bounce-back is expected to be swifter and sharper.”

The pace of recovery, though, will vary across segments.

Tenant categories such as grocery, apparel, footwear, cosmetics, electronics, and luxury, which account for 75-80% of mall revenue, had shown near-full recovery by the third quarter. These segments will recover quickly when the third wave wanes.

Other tenant categories, such as food and beverage, cinema and family entertainment centres, are likely to be hit harder by the drop in footfalls and could see a combination of rental waivers or continuation of a pure revenue-share model for longer than anticipated earlier. Recovery for cinema, in particular, is likely to be pushed back by 3-5 months due to postponement of some big-ticket releases. Rental waivers, however, are likely to be lower than the past two waves, considering the healthy recovery expected faster recovery post the third wave, as also witnessed earlier.

The pace of recovery will be mixed across geographies as well, depending on the intensity of the pandemic and the extent of restrictions imposed by local authorities.

Says Kshitij Jain, Associate Director, CRISIL Ratings, “The delay in recovery of mall revenue due to the third wave will, however, have a limited impact on liquidity and debt serviceability. Liquidity, which was equal to around five months of debt-servicing obligations in September 2021, is expected to shrink by up to one month due to the impact of the third wave. The debt service coverage ratio will remain below 1 time for most mall owners this fiscal. However, many malls with strong sponsors have demonstrated the ability to raise equity or refinance debt and, hence, are better-placed to absorb the impact.”

A higher-than-expected intensity of the third wave poses a downside risk to the estimates. However, limited vacancies reinforce retailer faith in malls remaining the key entertainment centres in urban India.

¹ These malls have leasable space of more than 10 million square feet spread across 10 cities, namely Ahmedabad, Amritsar, Bengaluru (2), Bareilly, Chandigarh, Chennai (3), Indore, Mumbai (2), Lucknow and Pune, and have debt of ~Rs 6,000 crore