Post-Lockdown Consumption -- The Key to Market Revival
Cushman & Wakefield today released its annual China Retail Supply / Demand Trends report. According to the report, by the end of Q2 2022, the total stock for all mid- to high-end shopping centers in the 16 major cities we track in China reached 97.2 million sq m. Since Q2, due to the spread of the epidemic in many cities, the opening plans for new supply projects in some major cities have been postponed to H2 2022 or 2023. What’s more, many retailers shelved or scaled back their expansion plans. As a result, net absorption in prime retail properties in the major cities in China reached 0.92 million sq m, down 48.1% y-o-y.
The supply / demand rundown for 16 city core area-level markets in China (Q2 2022)
Source: Cushman & Wakefield Research
Shaun Brodie, Head of Occupier Research, Greater China, Cushman & Wakefield said, “The Chinese consumer market has taken a short-term hit from the pandemic and other factors. However, in the mid- to long term, the Chinese retail market will gradually pick up as the central and local governments continue to introduce policies to stimulate consumption. What’s more, brand and retail property owners will continuously introduce new products and services to prepare for the recovery of the consumer market after the pandemic. As consumption picks up again, so we expect absorption of quality retail space to regain momentum in the coming months."
Shopping centers continue to optimize their operations, upgrade their facilities, and adjust their brand mixture to prepare for the recovery in the consumer market. In terms of supply, the main trends and influencing factors are as follows:
- The recently released policies to stimulate market consumption
- On-demand community retail coming to the fore
- A continued focus on omni-channel retailing
- Sustainability being taken ever more seriously by shopping center investors, developers, and operators
Duke Zhen, Managing Director, Head of Retail Services, China, Cushman & Wakefield, said, “China's retail market is becoming increasingly complex and diverse due to factors such as COVID-19, the rise of new consumption and the pursuit of sustainable development. Brand and retail property owners will continue to dig deeper into the market and innovate their business models to meet the increasing personalized and diverse needs of Chinese consumers. Cushman & Wakefield Retail Services will continue to promote the development of China's retail industry by working closely with retail-related enterprises operating in the China marketplace and helping to upgrade their brands and commercial properties.”
China’s retail market continues to introduce new business models, new types of services and innovative retail formats to adapt to changing consumer groups and consumption patterns. In terms of demand, there are many trends impacting the market in China but five which we look into in a little more detail include:
- The rise of new consumption brands
- F&B enterprises expanding into the semi-prepared meal market
- The ‘new baking’ concept bringing new business opportunities for bakeries
- ‘Green consumption’ ushering in new prospects for retailers
- New trends driving sport and fitness retailer growth
With government-led stable economic development, the internal demand for consumption by the general public in China should be catalyzed, which, in turn, will support the recovery in China's retail property market.
By the end of H1 2022, the total stock in Beijing's retail market was 15.1 million sq m, of which shopping centers reached 13.3 million sq m, accounting for 88% of total stock.
With the normalization of the epidemic, the customer footfall flow and consumption vitality of shopping centers in Beijing have gradually returned to normal. As of the first half of 2022, the average asking rental level in Beijing’s core submarkets has dropped slightly to RMB2,300 per sq m per month, while the vacancy rate has remained stable at 10%.
Given the epidemic, it is still taking some time for the market to recover, with much resulting pressure being placed on new projects and their leasing performance. Ahead, the overall pace of new market supply will continue to slow. It is expected that in the next three years, about 2.8 million sq m of quality retail space will be available in the Beijing retail market, with suburban areas still being the main localities for new supply.
Affected by the COVID-19 outbreak, residents were quarantined at home during April and May, with shopping centers reopening in early June after a two-month temporary closure. No prime new shopping centers launched in the Shanghai retail property market, and as a result, the total stock was maintained at 20.8 million sq m in the first half of 2022.
Demand for quality bricks and mortar shopping center space dipped due to the impact of the epidemic, with the overall vacancy rate increasing by 0.8 percentage points q-o-q to 10.2% in Q2 2022, the highest figure seen in the past five years.
Looking to the future, Shanghai‘s economic recovery will accelerate, and the consumer market will gradually pick up in H2 2022. Due to the large population and strong consumer spending, the outlook for Shanghai’s retail market is positive into the mid- to longer-term future. We can also expect the retail property market to remain one of the more popular destinations for investment over this period.
Shenzhen added 820,000 sq m of new prime retail supply during the past year. The total stock increased to 5.92 million sq m in Q2 2022, up 16.1% y-o-y.
Impacted by the epidemic, the average rental dipped in Q1 2022. However, with the support of city government stimulus measures to boost consumer spending, the retail market continued to recover.
In Q2 2022, the overall vacancy rate dropped 1.26 percentage points from a high in Q3 2021 to finish at 5.7%. Subsequently, the average monthly rental gradually returned to RMB860.21 per sq m.
Meanwhile, postponed project openings have pushed up the new retail supply scheduled for delivery in 2022 to approximately 520,000 sq m, with notable projects, such as Houhai Harbour and Teemall, to complete in the core submarkets.
Guangzhou's high-quality retail market added two new supply projects in the past four quarters, expanding citywide retail stock to 4.79 million sq m, up by 1.0% y-o-y.
Citywide new absorption over the past four quarters dropped 87.7% y-o-y to 125,530 sq m. Even so, the overall market vacancy rate increased by 1.2 percentage points y-o-y to 5.7%.
Approximately 440,000 sq m of new supply is now expected during the year. Although there are high-quality projects located in the core area, most of the new supply will be located in the non-core area. While the commercial atmosphere in the outer areas has been enhanced, general rental growth might be limited in the short-term future.
The city added a total of 273,000 sq m of new supply between Q3 2021 and Q2 2022. Consequently, the city’s stock total reached 7.39 million sq m, ranking third in the country.
Given the pandemic and in order to expand domestic demand and boost consumption, the Chengdu government issued consumer coupons in Q2 2022. This initiative has promoted short-term consumption and stimulated citizens' willingness to spend, thereby driving the city's rent to increase by 0.52% q-o-q to RMB624.11 per sq m per month. Moreover, due to successful upgrading work to some retail projects, in the Q2 of 2022, the city’s average vacancy decreased by 0.83 pp q-o-q to 6.86%.
Into the rest of 2022, Jiaozi Business Centre will usher in two heavyweight projects: Magic Cube and SKP. Upon completion, total stock in Jiaozi Business Centre will surpass that of Chunyan Business Centre to reach about 1.5 million sq m. At the same time, Chengdu could enter an era whereby there are dual commercial retail centers in the city.
Retail sales have performed steadily recently. According to the Hangzhou Statistics Bureau, in H1 2022, citywide total retail sales of consumer goods reached RMB342.8 billion, up by 3.0% y-o-y, and 3.7 percentage points higher than the national growth rate.
The sustained stability of the economic fundamentals has provided an important guarantee for the development of the city’s retail market. During the last year, ten commercial projects, with a combined 1.1 million sq m of new space, opened in Hangzhou, with the city’s prime retail stock climbing to approximately 5.8 million sq m.
Given the changing complexities of the macro environment, ahead, we might see some investment momentum begin to tail off as developers continue to make strategic adjustments in terms of their investment scale. Meanwhile, for leading enterprises, the development and expansion of the ‘asset-light’ model will continue to be a feature of the Hangzhou retail market in the future.
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