Worse glut in China's smaller cities may be in malls, not flats

An oversupply of retail space poses a more serious threat to property investors in the mainland's many third-tier cities than the much-talked-about housing glut, especially as an increasing number of people are buying goods online.

Recent visits to the third-tier cities of Xiamen, in Fujian province, and Yantai, in Shandong province, found both were expecting a flurry of shopping mall openings in the next three years that will shake up the local retail landscapes, now dominated by department stores.

While the housing markets in many other third-tier cities are coming off the boil, Xiamen is experiencing the mainland's biggest home price rises owing to strong demand from the Taiwanese across the strait and people from rich neighbouring cities.

Meanwhile, the housing market in Yantai is expected to land gently, as the market has mainly been driven by local end-users and prices have not increased much in the past few years.

But the outlook for the commercial property market in the two cities is much dimmer.

"Existing shopping centres are facing serious challenges from a large supply of new ones, as well as e-commerce," the Urban Land Institute said in a report last month.