China’s shopping malls are becoming polarised as customers seek out quality, says JLL
- Roughly the top third of malls are seeing healthy growth in sales and rentals, while shoppers are walking away from the bottom third – poorly designed, uninspiring precincts, says JLL
China’s retail market is one of the biggest investment opportunities of this century, but nobody said it would be plain sailing. In 2019, as growth shifts down a gear it is crucial for investors to focus on what the market needs.
With retail sales in China hitting 38 trillion yuan (US$5.66 trillion) last year, in 2019 it is forecast to become the world’s largest retail market. China’s annual retail sales growth of 9 per cent looks incredibly strong.
However, after accounting for inflation and stripping away fast-growing segments like online retail and rural retail, we find that bricks-and-mortar sales in China’s cities are growing at 2.8 per cent in real terms – still very respectable by global ,but well below the oft-cited headline figure.
While physical retail sales are seeing slower growth, construction of retail space continues apace. JLL
statistics on high-quality shopping centres in China’s top 30 retail cities show that some 161 centres
were completed during 2018, bringing the total stock to 1,330. JLL forecast data shows that growth is set to continue, with most cities projecting an increase in shopping centre stock of 20 per cent to 50 per cent in the coming three years.
With space expanding faster than sales, simple arithmetic dictates that on average, shopping centres
will produce lower sales per square metre, which should put downward pressure on rentals. But the real situation is more complex, with retail properties seeing performance polarise in ways that bring both risks and opportunities to investors.
Roughly the top third of malls, often owned by very experienced operators such as China Resources,
Swire, and Longfor, are seeing strong and occasionally spectacular increases in sales and rentals. That is because consumers are voting with their feet, and seeking out quality. They are looking for comfortable, well-designed indoor environments, novel experiences, and a creative mix of brands.
While online platforms are fast and efficient, the experience they offer can be a little one-dimensional
At the same time consumers are walking away from poorly designed and operated malls, and from the
boring and uninspired. It is these, the bottom third of malls, which are beginning to struggle, and will need to rethink, reposition, and reinvest to survive.
While some of these projects have major defects, many can be viewed as diamonds in the rough. As prices for underperforming assets moderate, there are lots of opportunities for hands-on asset managers to turn around problem retail assets and produce strong returns. This is the new frontier in retail development and investment.
While investors may focus more on refurbishment, retailers too will behave differently in 2019. The
China market is a strategic global market and retailers continue to have ambitious plans. Early signs in
2019 are that luxury growth is looking strong. However, at the same time, like-for-like sales for many
large retailers are showing limited growth. We believe that in 2019 retailers will start to pass more often on marginal opportunities. This will exacerbate the struggles of weaker malls, while benefitting already-popular properties and those that are executing well on turnaround plans.
model, such as Hema Fresh, are performing well. In the F&B market, “cloud kitchens” or kitchen-only F&B operations designed to take online orders, look set to take off. Online players such as VIP.com, Red and many more continue to open physical stores. All this underlines what we believe: all major retailers will ultimately have both physical and online elements to distribution.
As online booms and new retail becomes the norm, we are seeing more demand for high profile
flagship spaces. While online platforms are fast and efficient, the experience they offer can be a
little one-dimensional. Physical retail spaces clearly have a special role to play when it comes to
engaging with consumers, displaying products and creating brand value. Retailers are increasingly
conscious of the need for flagships and concept stores within their distribution ecosystem, and this will further drive the shopping mall market’s polarisation, as retailers want the best locations for these
major investments.
The China market is incredibly important. It is both large and innovative, and anybody who wants to
understand global retailing cannot afford to ignore it. 2019 will mark the beginning of a period of slower growth, but as the market shifts, new opportunities for property investors and retailers alike are
appearing, and China retail still has lots to offer.
James Hawkey is head of retail China at JLL
