Despite rising consumption overall, China’s retail real estate continues to suffer from serious oversupply problems, and it’s only going to get worse as new malls continue to open.
According to real estate firm CBRE, China is home to more than half of the world’s shopping mall construction.
Research from the China Chain Store Association and Deloitte shows by the end of 2015, China will have built 4,000 new malls since 2011, a jump of more than 40 percent.
“It could get much worse,” said James Macdonald, head of China research for Savills. “Some developers might postpone the completion of their products, but at the moment, we see oversupply continuing to increase in the next couple of years.”
Major mall developers are already feeling the pain. Dalian Wanda revealed plans this year to shutter or restructure 30 percent of its retail properties, while Malaysia’s Parkson has closed some of its 70 shopping centers in China following a 58 percent drop in net profits from this nation in 2013.
Despite these dismal stories, real estate developers continue to bet big on large-scale projects across China, partly because many new malls are part of mixed-use projects that are a portion of local government development plans, and partly because many of these projects were conceived at a time when China’s economic landscape looked different than it does today.
As Chen Lou, a retail researcher at JLL in Shanghai pointed out, the malls coming online now have been built on land that was bought at auction five or six years ago.
“Now the landscape has changed fundamentally, but once [developers] acquired the land and started development, they don’t have a way out unless they find a second buyer, so that’s the reality. It’s not that they don’t realize the competitive landscape has changed; they just have no way to back out,” she explained. “Three years from now, from 2017, this period will be the supply peak of Chinese retail, but beyond that there’s not that many malls being planned or built.”
According to China’s National Bureau of Statistics, household consumption accounted for 36 percent of gross domestic product in 2013, 50 percent in 2014 and 60 percent in the first half of this year. Retail sales have jumped more than 10 percent every month this year (compared with the same months in 2014).
But while retail sales might be rising in China, e-commerce is driving a large portion of this growth. EMarketer estimates that retail e-commerce sales, excluding travel and events tickets, will rise 42 percent in 2015 to $672 billion, easily making China the world’s largest e-commerce market.
This being said, according to Warner Brown, a senior manager of research at JLL in Shanghai, it is lower-end malls in lower-tier cities that are being hit hardest by competition from e-commerce.
“Malls around the country that are failing and turning into ghost malls are poorer malls to be
gin with,” Brown said. “They are failing not only because of e-commerce but because their management isn’t good and their focus is on low-end fashion, which is the category of retail most accessible online. So we see these malls being pretty badly affected.”
“Even in a very oversupplied market, there will be some malls that perform very well because they have the correct tenant mix, location and management, but for the overall market, it’s very, very tough at the moment,” Macdonald added.
Those malls that outperform in this competitive landscape will also focus on diversifying their offerings to include things that can’t be found online, including children’s playgrounds, fitness centers, restaurants and other experiences.
“Malls that can provide a one-stop shopping experience will likely outperform, while owners of smaller projects might find it difficult to cater to all types of consumers. Retail is more than shopping — it is also about making a place to enhance consumers’ experience,” said Frank Chen, CBRE’s head of research in China.
Also on the bright side, the central government’s emphasis on increasing domestic consumption, its push for moving a greater percentage of the population into urban areas and the continuing rise of wages will all benefit this proliferation of retail real estate in the long-term.
Plaza 66 in Shanghai.