SHANGHAI — Even with an overwhelming number of new shopping centers being built throughout China, there remains a shortage of prime real estate for luxury brands looking to open in the country or expand deeper into smaller cities on the Mainland, according to a new global retail report by CBRE Group Inc.’s CBRE Consulting.

This story first appeared in the April 23, 2012 issue of WWD. Subscribe Today.

Eight of the top 10 most active development markets for new shopping centers are in China, the report said. Out of the top 25 cities globally with the most new malls being built, 13 are cities on the Mainland. At the top of the list is Tianjin, a city outside of Beijing, where 26.4 million square feet are under construction. Shenyang, a city in the northeast, ranks second on the list while Chengdu, a metropolis in the south, is third.

The ongoing issue of pent-up demand stems largely from the fact that the new retail space is being “developed in up-and-coming areas of a city and not in the prime areas where international brands want to locate,” said the report, titled “How Global is the Business of Retail?”

“When you start to look at these big numbers, it is very frightening,” said Sebastian Skiff, executive director of CBRE’s retail division in Asia. “Of that space [being developed], how much of it is being built in prime locations and is being built with developers who truly understand how to create and manage a quality retail operation? There will be some losers in terms of the shopping center developers and developments.”

Skiff said the situation is being exacerbated particularly by luxury brands that are realigning their growth strategies in China to much more calculated openings in key cities versus breakneck expansion in as many markets as possible, as was more common in the past.

“If a new project was opening, very likely they [luxury brands] would make a few calls between their peers and decide if they were going to go into it,” he said. “Now there is much more choice, and you have to be more strategic. We are more busy because the retailers and the brands are realizing they need a bit more strategy around a particular city they are looking at. There is quite a lot more due diligence.”

The outlook is not totally bleak when it comes to finding prime real estate on the Mainland, according to Skiff, who said that increasingly developers are launching projects that are much more targeted in terms of the consumers they aim to reach. While it is true that the retail space being constructed here may not be suitable to top-tier brands, new malls, outlet malls and regional shopping centers are being built around cities that target middle-class consumers, as well as pockets of wealth, particularly in the suburbs of Beijing and Shanghai.

Skiff said that these developments bode particularly well for “bridge brands,” such as CH Carolina Herrera and Ted Baker, that are entering China and looking for locations to reach up-and-coming middle-class consumers who can’t afford a lot of luxury but are looking to change their consumption to something that is not so mass market.

“We are seeing some segmentation in fashion, which is translating into the brand mix of these new centers,” he said. “They are more focused on what is the next up-and-coming bridge brand location. They are not trying to be the catchall but trying to be more niche focused, so are focusing on a narrower age range, a narrower income level and essentially not trying to capture everyone [who would buy] Armani Exchange through to Giorgio Armani.

“They are being very selective to create their own brand story, which really shows a maturing of the customer and of the retail real estate market,” he said.

L’Avenue, an upscale retail complex that is being developed in the Shanghai district of Hongqiao, is one example. The complex will feature a mix of luxury brands as well as higher-end labels in an area that is home to a particularly affluent population of consumers, according to Skiff. L’Avenue is backed by L Real Estate, which is part of LVMH Moët Hennessy Louis Vuitton chairman Bernard Arnault’s investment firm Groupe Arnault, and STDM, which is owned by Hong Kong billionaire Stanley Ho.

“L’Avenue is a case in point,” Skiff said. “Once you have secured your major retail locations, the next step is to look at representations in the market that are affluent.”

Other trends on the Mainland include the opening of more multibrand stores as well as fast-fashion labels looking for retail space in more third- and fourth-tier cities. Skiff said he expects to soon see more international department stores eyeing China as well. Galeries Lafayette is slated to open a flagship department store in Beijing by 2013.

He also said that so far the retail sector is not experiencing side effects that indicate a deceleration of luxury consumption in the country. Brands such as Louis Vuitton and Burberry have reported slowing sales figures on the Mainland in recent months.

“I know the temptation is to maybe say that the marriage might be over, we are heading for tough times,” Skiff said. “I don’t see that. What I see is that there has been such a tremendous amount of expansion over the last few years, particularly if you look at someone like LV, they have essentially penetrated all of the second-tier cities and quite a large number of the key third-tier cities. Now that they have penetrated [these markets], naturally there would be a lesser increase [in growth] until the next wave that comes along.”

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