Want to invest in firms that run shopping malls? Here are some points to keep in mind

Different segments within the commercial real estate sector have had different recovery curves after the initial blizzard from the Covid-19 pandemic.

The recovery in the operational metrics of retail malls has been sharp since last August, after the brutal second wave of Covid-19. This trajectory was largely sustained in the second half of last financial year, barring the limited impact due to Omicron in early 2022. The recovery was driven by pent-up demand, high vaccination coverage and resumption of multiplexes, which also coincided with the festive season.

In Q3 FY22, the retail trading values reached the pre-Covid levels and in Q4 FY22, surpassed the pre-Covid trading values. According to rating and research agency ICRA, in the full year ended March 31, 2022, the trading values of retail malls reached 74% of pre-Covid levels and are expected to surpass pre-Covid levels in the current year.

The improvement in rental income has been faster post the second wave with recovery at 74% in Q2 FY22 (against 34% in Q2 FY21) and reaching 102% of pre-Covid levels in Q3-Q4 FY22. During the first and the second wave of Covid, waivers and discounts were given on rent. However, this was an exception during the third wave, barring certain categories like multiplexes.

In the current financial year ending March 31, 2023, the rental income is expected to rise by around 30% and is likely to surpass FY20 levels by 4-6%. But this is contingent on no further disruption in public life due to Covid-19.

Oversupply, debt metrics

The addition of new retail space was around 17 million sq feet (msft) in FY21 and FY22 for the aggregate of 11 cities. However, the incremental space absorption was only around 5.5 msft during this period, resulting in a significant increase in vacancy levels to 26% last year compared to 20% in FY20.

This is expected to shrink again this year.

Meanwhile, the debt-to-OPBDITA ratio is expected to ease to 6-8x this year from the elevated levels of 8-10x in FY22, with an expected improvement in OPBDITA as various operating metrics improve to the pre-pandemic levels.

The debt service coverage ratio, which was in the danger zone at under 1x last two years, is expected to improve to 1.1-1.2x this year with the improved rental recoveries.