Are pre-leased malls a good investment?

Are pre-leased malls a good investment?

By Harshvardhan


11th May, 2023


3 min read

shopping carts at a mall
Definition of pre-leased mall propertiesWhy should you invest in pre-leased malls?What are some pitfalls of pre-leased malls?How can you acquire profit from a pre-leased mall property?

There are around 255 operational shopping malls in the top 7 cities in India. Amongst which a few have gained a lot of popularity in the country. Also, the gradually opening economy has witnessed an uptick in the retail mall operational metrics, which has touched 80 percent of the pre-covid level in the second half of the financial year 2021-2022. With so much happening in the pre-leased mall circumference, let's understand what pre-leased malls are and the scope of investing in them.

Definition of pre-leased mall properties-

A pre-leased mall comes under retail pre-leased property, which is already leased to a tenant and is available for sale. This gives you the ownership of the property upon buying it and the authority of rental income generated by the property through existing tenants.

There are various pre-leased commercial properties, that include bank properties, schools, warehouses, shops, and retail. Every property mentioned has its own unique set of advantages and disadvantages when investing in them. Malls aren’t an exception.

Why should you invest in pre-leased malls?

All the pre-leased commercial properties provide rental income and higher ROI. But the most prominent factor of malls is that they are road-facing. Hence, they are often visited by customers. Besides, the outer appearance, displays, and theaters add to the maximum footfall of these properties.

1) Growth of malls-

The retail sector is expected to revive significantly by the end of next year, with as many as 31 new malls opening by then in the major cities, according to an Anarock report. As much as 10.15 million square feet of new mall supply will hit Tier 1, 2, and 3 cities in 2022, and another 7.25 million square feet will be added in 2023, retail real estate is poised for a strong comeback. This is a great opportunity for investors to invest in malls.

2) Reliable tenants-

Pre-leased shopping malls consist of big brands as tenants. Be it a good clothing brand or a food brand. These commercial properties occupy high-quality tenants and hence, give high rental income the majority of the time. Malls in India have started accommodating international brands which are replacing Indian brands gradually. Zara, for example, has overshadowed Central. Likewise, H&M has displaced Big bazaar and Pantaloon. According to the Vice President of Oberoi Mall, in Goregaon, Mumbai, International brands are offering better rental yields to the mall owners. These brands offer 25%-30% higher rental yields as compared to Indian brands.

3) Location benefit-

Most of the lucrative malls are in prime locations or investment hotspots. This ensures high footfall on the property. Location is a key aspect of a gainful pre-leased mall property. Hence, a buyer should always look for upcoming in-demand locations while investing. A mall property that is near the railway/metro stations, highways, or a busy street that has tourist attractions will prove to be profitable.

4) Long lease tenures-

Big brands and quality tenants generally prefer long lease tenures. As malls get high footfall and are road facing, their business is benefitted too. The lock-in period of an average pre-leased mall property ranges between 5-15 years. This way, the tenants create a good customer base in the particular area, and if the mall is popular enough, they get customers from different parts of the city too! At the same time, the owner doesn’t incur any loss if the tenant leaves the property before the end of the lock-in period. This is because a penalty is levied upon the tenant if the property is vacated before the estimated time period.

5) Investor advantages by revenue sharing model-

A few pre-leased mall properties work on a revenue-sharing model. This means the owner of the property gets rental income as well as the revenue generated by the tenants. For instance,

If a brand X (tenant) gives Mr. Mishra (owner) Rs. 10,00,000 as rent and has generated Rs.5 lakhs as revenue, the brand has to give a share of its generated revenue to the owner.

A coalition of more than 175 large modern retailers and restaurant chains including Levis, Domino’s pizza, Future group fashion, Aditya Birla group, etc. had appealed to their mall landlords to collaborate using a revenue-sharing model during the pandemic to overcome the decline in sales.

What are some pitfalls of pre-leased malls?

1) High ticket size investments-

Though pre-leased mall properties are highly beneficial, investment in these properties is very expensive. Other pre-leased properties like shops, schools, banks, and offices are relatively cheaper. For example, a pre-leased property in tier-1 city can range from 50 lakhs to 200 cr. Likewise, in tier 2 and tier 3 cities, pre-leased properties are comparatively cheaper. But when it comes to mall property, the normal price range starts from crores of rupees.

2) Difficult to find tenants-

Quality tenants are very important for a pre-leased property to give you good returns and rental income. But unlike pre-leased office spaces, wherein getting a good tenant is easy in this new startup world and budding businesses, malls predominantly need big brands to keep their footfall and work ongoing. Hence, it becomes very difficult for the mall pre-leased property owners to find a good tenant, which most probably is a brand.

3) High maintenance-

Malls are very huge spaces with many stores in them, and hence, consume a lot of electricity. Also, to pull more visitors, the mall needs to look presentable and needs a lot of luxury equipment to create an exclusive ambiance. Hence, these properties need to be maintained to keep them in a good condition and attract more people.

How can you acquire profit from a pre-leased mall property?

A pre-leased mall investment is a very profitable asset you can own if you do certain things right! Given below are some tips and tricks to make the most out of your mall investments-

1) A good tenant mix:

Invest in a mall property that has a variety of brands and fulfills all the needs of the customers. Shopping malls are designed to be a one-stop-shop, which means your property should cover clothing, grocery, food, theatres, and all the essentials and entertainment points to keep customers engaged for a longer span of time, once they enter the mall. A good tenant mix ensures continuous footfall and increases the popularity of the property.

2) Invest in a mall that is at the happening locations:

Convenience is the key to great property investments. Imagine a mall that is located in an area prone to traffic. The customer might come once but they will hesitate to visit again. This decreases the property’s value over time.

For example, IKEA, a mall known for home decor and furniture, opened its branch near Nagasendra metro station in Bangalore. The station, which sees an average of 13,000 riders everyday, on June 25, saw a whopping 23,878 people waiting in line to visit the store.

In fact. L&Ts seawoods grand central mall is built on seawoods railway station. This mall gets bulk footfall on a daily basis.

Hence, invest in a mall that is in prime location, convenient to travel, has facilities like parking space, etc.

3) Happening locations-

Your mall property needs to have some attractions around the property. For example, if your mall is near a scenic place in the city, there are more chances that your mall property might become a tourist spot too! This means, even more people will visit the place, giving you good profits and making your tenants extend the lease tenures.

Keep your mall engaging at all times. The interior and exterior of the mall should be compelling and attention-grabbing. Hosting exhibitions, fests, or small games in the outer space of the mall, can also help pull customers to your property.

Visibility of all the stores:

All the stores/units in your shopping mall should be visible to the customers. Invest in a mall property that is spacious and doesn’t have areas that are hidden behind the stairs, or in some corner. You might lose your tenant or not get a tenant for that particular store as people aren’t able to see it due to lack of visibility, resulting in low sales.

This way, we have given you a walk-through of the scope mall properties have for its investors in India. Now you might have become familiar with pre-leased mall properties and how to derive profit from them. Well, we have a lot in store for you. Head to our property page and discover multiple real estate investment opportunities on a go! Let us help you build your wealth through profitable investment options!

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Senior Investment Associate

Enjoys socializing and meeting new people, playing soccer on the weekends, sketching occasionally, and exploring new places.