Shopping malls will surpass office and residential space as the most profitable type of property investment on the mainland over the next two to five years, thanks to the nation's booming middle class and its fast-growing income, says ARA Asset Management, a property investment firm partly owned by Li Ka-shing.
"District shopping centres with a gross floor area of one million square feet or bigger, and a high [number of visitors] will offer the biggest upside with limited risks for private funds in the coming years on the mainland," said Ng Beng Tiong, the chief executive of ARA Private Funds.
Ng, a former investment banker, is targeting an internal rate of return of 20 per cent with the building and operating of shopping centres on the mainland through the newly raised US$441 million of Asia Dragon Fund II.
HSBC forecasts that 93 million Chinese households will join the middle class by 2015.
The China Chain Store and Franchise Association expects the number of mainland malls to jump 40 per cent to more than 4,000 by 2015.
Not all of the new malls would provide decent returns, so real estate funds would have to be selective, Ng said, warning that the presence of luxury brands did not guarantee fat margins.
"We don't go for malls that are full of Guccis and LVs (LVMH luxury goods), but the ones that serve the daily needs of a large catchment of residents and office workers," Ng said, citing Asia Dragon Fund I's Dalian shopping mall and Festival Walk in Kowloon Tong as examples.
Of the two private funds that closed last year, Ng plans to invest up to 70 per cent of the US$441 million Asia Dragon Fund II on the mainland, of which more than half will go to shopping malls that serve the growing middle class.
"It is the middle-income group that is growing faster in terms of their wealth and buying power, which translates into very strong fundamental support for shopping malls", he said.
The firm, in which Cheung Kong holds a 14 per cent stake, is looking to expand its footprint to key tier-two cities, such as Hangzhou, Suzhou, Guangzhou, Shenzhen, Chongqing, Chengdu and Wuhan. It already has projects under way in Shanghai, Beijing, Dalian and Nanjing.
By 2015, the retail market will double in key tier-two cities, according to HSBC research, and shopping malls will account for 74 per cent of the retail market in these cities, up from 51 per cent currently.