BLOG: How Kenyan mall owners got it wrong and the struggle to get tenants
In the recent past, we have read reports of malls struggling with occupancy while others have struggled with tenant retention. We have also seen that, in attempts to on-board tenants, some shopping malls have put out huge incentives to attract tenants.
One of the malls in Nairobi advertised a six-month rent-free offer for tenants who were willing to sign up within a stipulated period. Some malls have not even achieved 60 per cent occupancy two years post completion.
There is no set of rules or script through which to deliver a successful shopping mall, but the following factors are important when coming up with one.
1 Location: Think of a location that will be an ultimate destination that achieves convenience-shopping characteristics, which basically means tenants are trading throughout the week and not just on weekends. For instance, Kigali Heights, which won the Africa Investment Property awards for best mixed-use development in late 2017, is located at Kimihurura neighbourhood, next to Kigali Convention, and less than five kilometres from the CBD in Rwanda.
Location includes factors that could easily be dismissed at the development or construction stage, such as the mall being located on the right side of the road, which increases convenience. In cities like Nairobi where traffic is a major factor, location is even more critical.
2 Leasing strategy: Developing malls is complex and should be preceded by identifying the occupiers of the building. Tenants will have different needs and it is therefore best pre-designed as opposed to being customised post-construction. For this reason, the developer should hire competent leasing or letting firms to identify the key brands that are willing and able to move into the building.
Some experts recommend a 60 per cent pre-leasing before committing to a project as this helps in not only de-risking the project, but also lowers the cost of redoing spaces to fit certain tenant specifications. The anchor, sub-anchor, and large line tenants should participate in the design and construction stage to ensure their needs are incorporated.
Further, pre-leasing takes away capital-raising difficulties as the business model is proven to a certain degree and the investor can take a view on the tenants and the committed rental rates.
3 Tenant mix: This factor is key to the development of a successful mall. A tenant mix policy must be maintained for each mall and the same should be regularly updated to reflect the changing shopping trends. To maintain a good tenant mix plan, there should be continuous monitoring and evaluation of tenant turnover. The exiting tenant should inform the developer on replacement.
In mixing eateries, for example, ensure there is a mix of fast food, black tie, local foods and many others to ensure a captive market, including the office blocks within the building, is well served and the different economic groups within the mall are taken care of.
Most mall developers focus on the anchor tenant only and miss the positioning of the smaller brands. This makes it difficult for the smaller brands to trade properly, which eventually leads to their high turnover.
Within East Africa, anchor tenants tend to pay discounted rates as they are expected to drive in traffic into the mall, whereas smaller brands and line shops pay a premium as they benefit from the anchor tenant’s traffic.
Wrongly mixed, the line shops suffer and exit the malls. Positioning should not disadvantage the line shops. Additionally, a mall should push itself, as much as possible, to serve as a one-stop centre for its customers.
For example, a family should be able to take a toddler for clinic, and while at it, do some banking before the family enjoys lunch together, picks its shopping for the week, and maybe pays for its travel ticket.
4 Capital structure: This is critical because it informs the developer or investor of the expected returns, as well as what the fundraising priorities are, hence enabling them define the capital raising strategy.
A good capital structure will ensure the senior debt is covered on day one of opening the development. Malls struggle when the capital structure does not accommodate the development cash flow. The developer is therefore forced to charge unreasonable and unsustainable rental rates in order to meet the mall’s obligations.
This has led to a crisis in most malls where tenants exit the development or seek to renegotiate the leasing terms, particularly the rent, downwards. The result is that the developer will struggle to meet obligations.
While modelling a retail development, one should factor in a sensitivity analysis on, for example, a drop in rental rates or a drop in occupancy, just to have an idea of what the downside will look like.
Mr Kamau is the CEO, Fusion Capital Limited.