CBRE Releases China Retail Property Investment Guide
CBRE Releases China Retail Property Investment Guide
October 15, 2014
Shanghai, Beijing and Hangzhou Rank as Best Markets for Investment
October 16 2014, Beijing – Leading commercial property management and investment consultancy CBRE has released MarketScore: the Key to Investing in the China Retail Market, a special report that analyzes retail property investment opportunities in 17 major cities in China. The study concludes that Shanghai, Beijing and Hangzhou currently offer the brightest prospects for retail real estate investors, and further advises that investors must exercise caution when considering opportunities in China's second-tier cities such as Shenyang and Wuxi.
The new report, which follows an earlier CBRE MarketScore report released in January focusing on the China office property market, analyzes the 17 city markets in terms of 14 key indicators that influence the retail property market performance.
It should be noted that a MarketScore ranking reflects the overall investment conditions for a given city. An excellent quality retail property in a city with a low MarketScore ranking may therefore still merit consideration, while an average quality property in a city with a high MarketScore ranking is not necessarily a good investment.
Shanghai, Beijing and Hangzhou Rank Highest, Chengdu Takes Fourth
Shanghai's retail property market currently exhibits both strong supply and strong demand. Retail rents in the city have been increasing at a steady pace, with rents in central areas increasing at a CAGR of about 7.9% and vacancy rates remaining well below 10%.
As the leading city real estate market in China, Shanghai has long attracted interest from retail property investors and transactions have been consistently brisk. According to CBRE statistics, en-bloc investments (transactions greater than USD$ 10 million) in retail properties in Shanghai in the period 2005 - 2013 totaled some RMB 34.5 billion in value, accounting for approximately one third of the nation’s retail en-bloc transaction volume during the same period.
Secondary commercial hubs in Shanghai have been developing rapidly, and CBRE expects they will continue to grow at an even faster rate. Between 2010 and 2013 these secondary areas grew by 67.1%, some 46.6 percentage points higher than the growth rate for the core retail areas in the city. Meanwhile, vacancy rates in the secondary areas declined from 15% at the start of 2010 to 11.3% by end of 2013.
Beijing likewise holds significant potential for retail property investors. The capital city ranks highest in the nation in terms of overall retail consumption, with spending on high-end goods accounting for a considerable proportion. Additionally, the retail stock in Beijing is relatively dispersed, with only 20% of it located in central hubs such as Xidan, Wangfujing and CBD areas, and the remaining 80% distributed among a range of secondary sub-markets. With land in short supply within the city's five ring roads and new regulations prohibiting the construction of large-scale public projects in core areas, the Beijing retail market is expected to continue evolving in decentralized fashion.
Beijing holds strong attraction for international retailers, who are entering the city market at increasing speed. CBRE research has revealed that in 2013 alone 34 new international brands entered Beijing, more than three times the number for 2012.
Tight supply is the most salient feature of the Hangzhou market presently. The city has a relatively small stock of retail space and very low vacancy rates. As of Q2 2014, supply of high quality retail properties in the city totaled only about 1 million sq.m. and vacancy rate was only 1.7%, both numbers the lowest among all 17 cities covered in the MarketScore report.
Unsurprisingly, these conditions have been driving rents upward at a fast rate. Data collected by CBRE shows that in the period Q2 2011 - Q2 2014, rents for ground-floor space in high quality properties rose by 20.9%, far higher than both the 8.7% average increase for second-tier cities and the 9.5% jump in the national index for the same period.
A low number of en-bloc transactions in the city over the last few years means Hangzhou occupies a middle position among the 17 cities on the Risk index of the MarketScore model. However, it is likely that investment in retail properties in the city will pick up over the coming 2 to 3 years.
Rapid growth in the operations of international and domestic retailers in the Chengdu market has resulted in significant absorption at the city's prime retail locations during the last three years. Chengdu has risen to become China's "Fourth City" in terms of consumption.
The vacancy rate for high quality properties in Chengdu is only 7.6%, but a large amount of new supply now in the development pipeline means increasing challenge for investors in coming years. According to CBRE research, Chengdu presently has 3.2 million sq.m. of shopping center space under construction, making it the 2nd most active city in the world in terms of retail property development. Only Shanghai, with 3.3 million sq.m. under construction, ranks higher. Approximately 3.9 million sq.m. of new supply will enter the Chengdu market by the end of 2017, of which 75% will be in secondary areas. These secondary areas will mature gradually over the next 2-3 years.
Shenzhen Underperforms; Supply Exceeds Demand in Shenyang
Shenzhen is the only first-tier city that failed to achieve a top four ranking on CBRE's MarketScore index, coming in at sixth. This is surprising given that city residents have the highest average disposable income among major cities in China, and that their consumption power is likewise among the highest in the nation. However, a significant portion of consumption by city residents -- high-end consumption in particular -- takes place in Hong Kong. Moreover, Shenzhen currently has the second highest amount of retail space per capita among major cities in China, with two times more space per capita than Shanghai or Hangzhou.
Some 2 million sq.m. of new supply that will come on line over the next three years will make finding tenants more challenging for Shenzhen's shopping center landlords. Individual investors are active in the retail property market, and most transactions in the city have been strata-title transactions, limiting opportunities for en-bloc investments as a result.
Shenyang is the largest retail market in Northeast China. The city has an abundance of department stores and shopping centers, and the overall retail vacancy rate stood at a relatively high 19.1% as of Q2 2014. Retail centers in the city face three main challenges: local consumers prefer to buy clothing and footwear at department stores, and visit shopping malls chiefly for dining and entertainment; lack of differentiation and uniqueness; developers of many of the city's shopping malls lack of operating experience, resulting in poor performance by these properties.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2014 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.