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News: As per media reports, mall owners are planning to increase rent of stores leased on an annual basis. Malls usually sign nine-year agreements with the retailers with a 15% increase in rentals every three years. If rents increase 5% each year, retailers will have to shell out about 17% in three years. Some mall developers also said they will push for a 20% rental hike in three years given the inflation and cost of raw materials
Views: Rent is one of the key cost components for retail companies (10-12% of sales). Brands invest a lot in fit-outs and annual rental hikes would escalate the cost structure for the retailers. A brand has to manage many stores and annual hikes will lead to a tough situation where every month brands will have to keep rental hikes in mind. If rentals increase significantly it can negatively impact the store level profitability of retailers
Impact: Negative