China’s Retail Meltdown and Retail Real Estate
- Team Best Retail Consultants
The worldwide financial crisis is now affecting the retail sector in China. After the Olympic Games, retail in Shanghai, Beijing and the coastal cities are down by 20-40% in same store sales. Surprisingly, inland cities are less affected, most stores are down by 10-20%. The reasons are that the retail volume and base of inland cities are relatively low and more importantly also the delayed effect of the financial crisis in coastal cities spreads slowly to inland cities.
As in other industries, the boom and bust cycle in retail real estate is likened to reshuffling of the deck of cards. Players will change and the Good will be more distinguishable from the Bad and Ugly. We know of many retail projects in cities that bite the dust. Even in mature malls we hear of brands walking away from commitments on store openings. A major luxury brand that opened new stores like convenience stores during the last two years, has stopped store development. Opportunities will arise for discerning investors considering stalled retail projects or distressed properties - but buyer beware of hidden dangers.
The key is to look for investment in under performing malls in secondary cities, preferably in the South West region. The reason is that for the next 2 or 3 years the Central Government will be spending on infrastructure and uplifting the living standards of the rural areas. Therefore those are growth areas. After identifying the city, zoom in on the project, check its portfolio and pay close attention to anchor tenants with long leases because they usually pay low rents and the mall is unable to replace them with higher yield tenants until their leases run out. Another point to note is the trade mix. If the trade mix is high with F&B, digital and appliance operators and if leases are shorter, then the turnaround would be faster.
After identifying the opportunities, the best way forward is to upgrade the mall with a new image, reorganize the tenant mix. Morgan Stanley tried to do that with Infiniti before the crisis in Shanghai. But it was a dismal show. After some years, Super Brand Mall came alive but in the next 2 or 3 years may have to contend with the new IFC in Pudong.
In conclusion, it is always best to have your own leasing and management team when you consider taking over a mall. It’s not just as simple as residential or office buildings. Real Estate Agents may be able to help by getting some tenants for your new acquisition but don’t bet on them to fully complete the whole exercise.
Shanghai Team Best Retail Consultants provide turn-key retail solutions for developers of shopping malls and department stores comprising retail concept design, project development, direct leasing, A&P and mall management. For more information, please go to our website at www.teambest.com.cn.
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