China’s shopping centre and street shop landlords offer rental discounts to contain retail space vacancies, supply pressure

The vacancy rate of prime retail space in Shanghai stood at 7.6 per cent at the end of June, while Beijing recorded 8.1 per cent in the same month
Guangzhou’s retail space vacancy rate reached 9.7 per cent in June, while southern tech hub Shenzhen posted a 4.8 per cent rate in the same period

China property

Daniel Renin Shanghai

Published: 6:00am, 24 Jul 2023

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Landlords of shopping centres and street shops in China’s major cities are now increasingly offering rental concessions to avert higher retail space vacancies amid sluggish consumer spending.

Retail spaces located in non-central business district areas will find it difficult to maintain tenants or lure new brands in the second half of this year because many companies prefer prime locations, where strong foot traffic can be guaranteed, according to property service firm JLL.

“Decentralised shopping malls do face pressure [to retain tenants],” said Neo Huang, head of retail agency leasing business for JLL East China. “Owners and managers are supposed to add some lustre to their projects via meticulous design and deco, so that their malls can become attractive to brands.”

The challenging situation for these retail spaces reflects the country’s uneven post-pandemic recovery, with faltering private confidence, record high youth unemployment and overhanging risk in the property market.

People walk along a pedestrian street surrounded by shops in the Huangpu district of Shanghai on June 15, 2023. Photo: Agence France-Presse

The vacancy rate of prime retail space in Shanghai, for example, stood at 7.6 per cent at the end of June versus 8 per cent in December 2022, as China’s reopening from the Covid-19 pandemic in January fuelled commercial activities, data from property agency CBRE showed.

That was a direct result of consumption remaining weak in the mainland’s commercial and financial capital.

Shanghai’s retail spending in the first six months of 2023 grew 23.5 per cent year on year to 937.8 billion yuan (US$130.6 billion), the local statistics authorities announced on Thursday.

Still, that growth fell largely short of analysts’ expectations. The consensus forecast was a 30 per cent increase from the same period in 2022, when a two-month citywide lockdown caused by the coronavirus outbreak severely hurt Shanghai’s economy. The city’s gross domestic product contracted by 5.7 per cent in the first half of 2022.

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“There are bad signs that some retail brands are looking to cut their rental costs by reducing the number of outlets or cutting the size of shops,” said You Liangzhou, who owns property agency Baonuo in Shanghai. “The bearish outlook for the commercial real estate market will force some landlords to offer discounts on rents.”

In the second half this year, Shanghai will see a fresh supply of about 500,000 square metres of prime retail space, nearly tenfold the new space of 53,000 sq metres recorded from January to June, according to CBRE.

In Beijing, the vacancy rate stood at 8.1 per cent in June. An additional 1 million sq metres of retail space will be made available in the nation’s capital between July and December, more than triple the supply of 327,000 sq metres in the first half.

Guangzhou, capital of southern Guangdong province, will see 260,000 sq metres of new retail space in the second half, compared to 60,000 sq metres of new supply in the first six months. The city’s vacancy rate reached 9.7 per cent in June.

Cosmetics sellers check an order with a customer at the Mingtong Digital City market in Shenzhen’s Huaqiangbei retail area on November 5, 2020. Photo: Reuters

Shenzhen, which borders Hong Kong, saw a vacancy rate of 4.8 per cent in June. In the second half, new supply in the southern tech hub is estimated to reach 700,000 sq metres, a 156 per cent surge from 273,000 sq metres in the January-to- June period.

China’s economy grew 6.3 per cent in the second quarter, below the consensus forecast of 7 per cent by economic analysts. That marked the latest sign that a recovery driven by the border reopening and the shift away from zero-Covid-19 measures had failed to live up to expectations.

In June, retail sales growth across the nation fell 3.1 per cent year on year. That was down from an 18.4 per cent increase in April and 12.7 per cent in May.

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Zhou Shiyu, a senior official at Shanghai Join Buy, one of the city’s biggest commercial property owners, said landlords are planning for rainy days because some underperforming brands are likely to close down their shops in the coming two or three quarters.

“Landlords are giving priority to retain existing tenants by offering rental concessions,” he said. “It is time to play defensively.”

JLL’s Huang said sportswear and sports equipment brands, skincare and perfume brands, emerging designer fashion brands, electric vehicle makers and smart home device retailers are still pursuing prime retail space, despite the slowing economy.