Developers spruce up malls, scrap goodwill charges to woo tenants

Floor space is not selling as fast as
Floor space is not selling as fast as anticipated, forcing realtors to slash goodwill that previously ran into millions of shillings, hire interior designers to spruce up the buildings, set up indoor entertainment spots and offer freebies. PHOTO | FILE 

Staring at empty mall spaces, developers are now getting creative in a bid to continue earning profit as realtors eat into each other’s clientele.

Floor space is not selling as fast as anticipated, forcing realtors to slash goodwill that previously ran into millions of shillings, hire interior designers to spruce up the buildings, set up indoor entertainment spots and offer freebies.

The glut in mall space has changed the way developers and operators treat tenants as they seek to edge each other out for some scraps of profitability in the abundance of empty mall space and falling tenancy.

Some owners are even opting to occupy huge spaces with their own businesses.

“Landlords should be ready to go business unusual. Failure to consider the target population which has a direct bearing on spending power...the non-performing enterprises are doomed to close down and consequently the vacancies that have been witnessed in various malls arises,’’ said Njeri Njoroge, a senior property manager at real estate company Regent Valuers International Kenya.

Nairobi already has 391,000 square metres of existing mall space with an additional 470,000 square metres in the pipeline, according to Knight Frank’s ‘‘2016 sub-Saharan Shopping Centre Development Trends’’.

By producing an almost same product, the mall industry has pushed itself into cannibalisation, a concept that refers to a reduction in sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producers.

Goodwill charges

Ms Njoroge said that some practices that were common place just a few years ago are no more with the customers acquiring the upper hand in bargaining.

“The landlords are no longer keen on asking for goodwill charges to have a competitive edge,” she said.

Muchiri Wahome, Deacons East Africa chief executive officer, said with the rate of developments, cannibalisation has already begun taking effect.

Mr Wahome, who runs 10 brands such as Truworths, Mr Price, Adidas, Identity, 4U2, Angelo, Life Fitness and babyshop under the East African franchise, said that landlords will have to listen to their clients and change business models to make any sensible profits.

“Obviously, the business model is going to be put under pressure since some developers have gone ahead and put up malls without talking to retailers and understanding who are going to be their tenants,” Mr Wahome said.

Lower rents

The first casualty will be the rents. For investors interested in taking up spaces, the question will be if the malls are affordable.

“The tenants of these shopping malls have traditionally been international brands who have economies of scale and lower cost of money than us who depend on private equity funds and banks. The excess supply brings the possibility of helping us access those spaces by reducing the cost of rent,” said Obado Obado, the founder of Café Deli, a coffee shop and restaurant chain in the Central Business District.

Mr Wahome said that mall developers are going to struggle to fill spaces unless they have well thought-out strategies.

He said the greatest effect witnessed in the industry has been rents going down.

“Rent has gone down by as much as 15 per cent in the current year for everything that is being put on offer right now. I have just done a deal in Nyali, and the offer came in at Sh260 per square feet and we are right now at Sh165 per square feet,” he said.

Ms Njoroge, however, said the move to accept cheaper rates to at least have the building occupied may not be profitable in the short run.

Mr Wahome said the influx would lead to a stratification of mall spaces to accommodate small and medium-sized enterprise at the lower grade level. “I think what effectively would happen, like other developed markets, you’ll end up with A grade, B grade and C grade malls,” he said.

The trick will lie in segmenting a mall’s targeted tenants and strategically attracting the right mix of customers.

The developers are lucky, however, that competing businesses that are usually the main or anchor tenants would not want to leave an opportunity out and allow their competitors to fill the void.

“The risk, if you now stay away from an A grade mall with your brand, it means there’s opportunity for someone to come in and do it,” Mr Wahome said.

Ms Njoroge said the right tenant mix will determine the stability and sustainability of the malls and thus the occupancy.

There should be the aspect of complementary businesses other than competing businesses within a mall. Most importantly, the anchor tenant whose prestige and name recognition attracts other tenants and probably shoppers will benefit the ancillary tenants.

Retail space operators go for supermarkets like Carrefour who are signed up even before construction.

Then they go to the second tier clients who are the sub anchors such as Deacons, Hotpoint, Zucchini, Java, KFC, Bata who give flavour to the mall and fit into spaces like fashion, accessories and banking.

Then when implementing the mall strategy, the sub anchors will sit just above the anchor, the supermarket. And as you go up the ladder your rent gets more expensive even as the space gets smaller.

Shorter leases

“You are looking at the anchor at the bottom getting about Sh100 per square feet and the top tenant, the boutique getting at Sh200. But it’s also because of size and space because you see at Sh100, a supermarket could be taking 18,000 square feet then this boutique is taking 100 sq feet or 20 the mathematics are revised because of space,” Mr Wahome said.

He said that in future landlords will have to offer small businesses incentives to take up remaining spaces while allowing the bigger clients more flexibility.

For the big tenants, Ms Njoroge said some developers, through their agents, would be willing to provide deals with the extended lease terms, instead of going with normal two to six year terms. They are now willing to make it longer to eight 10 years.

‘‘You get five-year leases, seven-year leases which is what we traditionally do, but for small businesses they will want options to exit,” she said.

Landlords are willing to give rent rebates and reductions for a certain period of time to ensure the tenants who have already taken space do not move out.

For the small tenants, Mr Wahome said the landlords will have to reduce the spaces they are offering from the traditional very large spaces.

“They will have to reduce the amount of space because the individual small retailers will have to face what we call the open stock package because the bigger the space you take the more you have to stock it up so capital becomes a big challenge,” he said.

Attractive finishes

He said that landlords will also have to move away from quarterly rentals to monthly. Those who are used to quoting rentals in dollars will have to quote in shillings because small businesses cannot take the currency swings exposure.

Developers are also incurring additional costs to set up attractive spaces that can compete in the market. Traders can now get finished floors, walls that have been plastered and painted and negotiate any other items within the facility that you require for you to trade.

“Before, landlords and developers would give you what we call a grey box, grey cement floor, grey walls. Without a door, just a box and you have to pay exorbitant goodwill rates,” Mr Wahome said.

Ms Njoroge says free parking is also another way the landlords are adopting to attract business investors in a mall. The norm has been to charge a fee to the tenants on a monthly basis or daily rates.

Consequently, the same has been extended to the shoppers. Others include provision of extension services like Wi-Fi and Internet connection.

One-stop experience

Malls are also turning into entertainment hubs to attract mostly women who want to shop and allow their children some leisure.

“Children are driving their parents to where they want to spend time. So you’ll go to The Hub today and find a new aspect of entertainment. They have got electronic games and all sorts of gadgets in the entertainment environment. You go to Thika Road Mall the same thing, they are very popular. On Fridays, Saturdays and Sundays those places are packed. So that means that parents are going to malls to give their children entertainment so that they can also do their shopping and eat,” Mr Wahome said.

Promotional campaigns and popular events around the malls are also being used to advertise the existing businesses.

Going forward, Ms Njoroge said, the developers should get it right from the project inception.

Before coming up with new malls, developers will have to think strategy by doing a proper feasibility study.

Valuers should also help the developers in the choice of real estate development to undertake; an aspect that many have ignored.

“This would inform a demand-driven development. What has been happening is that the developers consult when they already have a project in mind and may not be willing to change their mind,” she said.

Regional glut

Trends have shown that malls should always be on the home-bound routes, a problem that some malls are grappling with since they are off the highways.

Mr Wahome, whose firm operates across East Africa, says that the problem is not only in Kenya as Kampala, Dar es Salaam and Kigali are also staring at retail space glut.

“In Kampala, we have six malls that we are reviewing. You go to Kigali there are two, we have already gone into one. Dar es Salaam has six different malls under construction,” he said.

Gradually, counties are also seeing an increase in mall construction.

‘‘In Meru there are two malls that Deacons is considering, in Kisumu there are three malls. In Nakuru, there are two more malls,’’ he said.