China’s mall boom outstrips demand
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Bonnie Cao and Liza Lin Shanghai
Chinese landlords are forgoing rent and paying to outfit stores for mass-market fashion brands including Zara and H&M, a bid to blunt the impact of a boom in shopping mall construction that threatens to push up vacancies.
Preferential leasing terms were reserved until recently for luxury brands such as Louis Vuitton and Gucci, which are coveted because they bring shoppers into malls. Now moderately priced labels are being enticed with offers as landlords work harder to fill shops, according to Cushman & Wakefield and RET Property Consultancy.
Consumer demand is cooling as China’s economy slows and President Xi Jinping reins in lavish spending by officials.
Big mall operators, including China Resources Land and Hang Lung Properties, can withstand the slowdown at the expense of smaller ones such as Golden Eagle Retail, according to Credit Suisse and Haitong International Securities.
Landlords focused on lower-tier markets will be under more pressure as smaller cities add retail space at a faster rate than larger ones.
“Competition in China’s commercial property market is very fierce, especially at those new malls at non-central locations in second- and third-tier cities,” said Carrie Liu, the Shanghai-based general manager for development at Shui On Development, a subsidiary of Shui On Land.
The company, which built the city’s Xintiandi restaurant, bar and retail district, had never offered subsidies such as free rents, Liu said.
Chinese developers built more malls and expanded into smaller cities as consumer spending and incomes grew, elevating China’s economy to the largest after the US.
Half of the 32 million square metres of shopping centres under construction around the world are in China, according to CBRE Group.
About 21 million square metres of retail space is expected to be completed by next year, a 38 percent increase in supply, according to broker Cushman, which tracks 20 cities in China.
That’s setting up a test for developers as retailers including LVMH Moët Hennessy Louis Vuitton and Gucci-owner Kering respond to slowing growth by scaling back expansion plans in the country.
Second-tier cities, including Chengdu, Shenyang, Hangzhou and Qingdao, may be stuck with the highest vacancy rates in 2014, according to Cushman. The financial hub of Shanghai, the capital Beijing and the southern industrial cities of Guangzhou and Shenzhen are considered the first-tier cities.
Vacancy rates in some less affluent cities could surge to more than 30 percent by next year from as low as 6.8 percent in the first quarter this year, Cushman forecast.
“The problem we see today in China is that there’s really no proper planning,” said Sigrid Zialcita, the Singapore-based managing director for Asia Pacific research at Cushman. “There are really a number of cities prone to having periods of oversupply.”
Mall space in China’s four major cities will grow about 40 percent by the end of 2015, while in 16 smaller cities it will double in the period, according to Steven McCord, a China retail research director at property brokerage Jones Lang LaSalle.
Developers of some new malls might struggle to reach 70 percent occupancy, forcing delays in opening, said Michael Zhang, the executive director of RET Property Consultancy.
In developed markets such as Hong Kong and Singapore, vacancy rates are between 6 percent and 7 percent because of a shortage of supply, according to Cushman.
“Free rent can exist in any market where the tenants have the advantage,” McCord said. “China’s characteristics are that there’s a lot of new construction and there is so much new supply.”
Hong Kong-based China Resources Land has the best mall locations and highest internal rate of return on its mature malls at about 20 percent, among five major operators from outside the mainland, including Hang Lung and CapitaMalls Asia, according to Credit Suisse. It rates state-owned China Resources Land outperform with a 12-month price target at HK$29.80 (R38.03). The stock closed at HK$21.20, up 4.2 percent on Friday.
While “it may be debatable whether China’s housing market is oversupplied, there’s consensus that China’s commercial property sector is”, Jinsong Du at Credit Suisse said. “Bigger mall developers definitely outperformed those smaller ones.”
Two calls to Annie Li, a Hong Kong-based investor relations director at China Resources Land, were not answered.
Hang Lung is investing more than $8.5 billion (R183.1bn) building malls in China, a bet by chairman Ronnie Chan on an expanding middle class. Fifteen of 23 analysts recommend buying the stock. Elisa Fong, the assistant manager of Hang Lung’s corporate communications, declined to comment.
Brokerage Maybank Kim Eng raised its earnings forecast for CapitaMalls Asia for the financial years 2013 to 2015 by 5 percent to 10 percent, and reiterated a buy recommendation in April, with a 12-month price target of S$2.57 (R20.07). The developer closed at S$1.795 on Monday. – Bloomberg