SHANGHAI — Demand for prime retail locations in China is expected to remain strong this year despite mounting concerns about the market and brands’ increasing consolidation of their store numbers.
Retail rent growth slumped to between 0 percent and 2 percent last year, compared with the previous average of 5 percent to 7 percent, according to research by real estate agencies like CBRE.
In major cities such as Shanghai, rent hikes are also decelerating and are expected to grow by just over 1 percent this year.
Slowed economic growth and an oversupply in both the amount of retail space and brands’ own presences in the Chinese market are the main reasons for lower rent increases. Still, rents in prime locations and high-end malls are expected to remain relatively firm.
“Many of the ‘big’ luxury brands were overexposed in China and are scaling back slightly, but still see the market as being very important going forward,” said Joel Stephen, CBRE Asia’s senior director, head of retailer representation.
Rent slumps like in Hong Kong won’t hit the Shanghai market as the retail sector simply found an “equilibrium” between supply and demand that follows a retail supply increase of 60 percent between 2010 and 2015, according to CRBE.
New spaces, however, will struggle and oversupply of space is a concern, Stephen said.
Fashion-hungry Shanghai is currently adding about 1.1 million square feet of new supply in prime retail floor space, a figure that is expected to rise to more than 3.24 million square feet in 2018.
Increasingly, too, vacancy rates are expected to go up.
“Demand for space declined, especially from luxury brands. Vacancy rates, although not high, are expected to increase in 2016 given there is a lot of new supply coming to the market,” Stephen said.
Rents at malls are facing the most pressure due to the craze of opening more and more shopping complexes. Many local governments in Shanghai see malls as a way to boost the economy and increase their district’s tax revenues. Real estate developers, often tightly linked to the government, have been spurred to build colossal malls in areas where they may not attract the right amount or mix of shoppers necessary to get brands to rent, Annie Houn, China director of retail services for real estate company Colliers International, said.
“If you count the whole area and all the new supply out there, it’s horrible….There’s huge pressure on the market, and especially the newer malls will be in big trouble” to attract tenants, Houn said.
Last year alone, Shanghai added more than 538,195 square feet of retail space in shopping malls, which led to an overall increase of the vacancy rate to 12.4 percent, up from 1.7 percent, according to data released last month by Colliers.
Shanghai malls have been known to offer particularly low and favorable rents to certain brands, and at times have entirely waived them in a bid to fill space. Still, many malls in non-prime locations are eerily empty, lacking shops and shoppers.
Including malls opening, this year will see close to 1.1 million square feet of additional retail space added in Shanghai, almost twice as much as last year, Colliers estimates.
Knight Frank estimates the figure to be even higher, at more than 2.2 million square feet of gross floor space over 25 new retail malls that the property consultancy says will open this year.
“Oversupply in noncore areas is certainly a concern and we expect to see increasing vacancies, but the oversupply challenge has less impact on core areas where there is still ample demand for space,” Stephen said.
Houn agreed that high-end malls and other prime locations are less affected but also had to shrink their annual rent hikes from the typical 7 percent or 8 percent to around 5 percent, or have offered a month of free rent if a new lease agreement is signed.
Pop-up stores and accessible luxury brands will likely become a more common sight as the market starts to slightly shift from luxury goods to mid-range items affordable to the growing middle class, a trend already seen in Hong Kong, where a slump in Chinese shoppers has led some luxury brands to close their stores.
The impact on rents has been dramatic. Luxury watchmaker Jaeger-LeCoultre shut its store in Hong Kong’s Causeway Bay last year and was replaced by a discount cosmetics shop that reportedly negotiated a 40 percent drop in rent, while Coach moved out of its corner shop on Queen’s Road, making room for Adidas, which reportedly pays 22.5 percent less than the handbag-maker.
Prime retail rents in Hong Kong are expected to drop by 15 percent this year. Growing market pressure, CBRE said, has made landlords more prone to negotiate rents. Stagnant growth and rising operating costs have also led some brands to consolidate stores in China, and more shop closures are expected for this year, CBRE said.
Even if rent hikes are decelerating, demand in prime locations in cities like Shanghai remains strong. Annual rent for a 2,1oo-square-foot store in high-end areas in Shanghai is estimated to cost about 8 million yuan, or $1.2 million at current exchange.
Last year, luxury goods purchased in China slipped by 2 percent to 113 billion yuan, or $17.2 billion — still considered relatively strong, given the economic downturn.