CBRE Identifies China’s Four Retail Property Trends in the Post-pandemic Era

China’s consumption and retail property markets are recovering as expected, with first-store and omni-channel retail among key post-pandemic retail property trends, according to CBRE’s latest report Retail in the Post-Pandemic Era: Trends and Opportunities.

The recovery of China's consumer market had a positive knock-on effect on retail leasing demand in Q2 2023, with nationwide net absorption volume increasing by more than 3 times on both a q-o-q and y-o-y basis, CBRE data showed.

Cumulative net absorption reached 1.42 million sq. m. in H1 2023, an increase of 189% over the same period of 2022, returning to a level slightly above 75% of the average value for the same period in the five years prior to the onset of COVID-19.

The rebound in demand ensured vacancy fell to 9.3% in Q2 2023 after rising for four consecutive quarters. At the same time, the decline in nationwide ground floor shopping mall rents narrowed to just 0.2% q-o-q, underpinned by the stabilisation of rents in Beijing, Shanghai and tier-ll cities in East China with strong consumer fundamentals.

CBRE noted in the report that COVID-19 has accelerated the uneven evolutionary process in the retail property market. While the overall trend is improving, the differences between projects due to location, quality, and operational capabilities have been amplified. At the same time, the impact of the epidemic on the consumption, lifestyles and values of domestic residents will accelerate the emergence of structural trends that will have a far-reaching impact on retail brands, in areas ranging from store strategy to sustainable development. These trends will also influence demand for retail properties and asset management.

Post-pandemic retail property trends

Trend 1: China is still a top choice for retailer expansion

CBRE's 2023 Asia Pacific Retailer Survey found that 71% of retailers plan to increase the number of stores in China this year, with China's tier l cities retaining their top position as a target for overseas expansion by international brands.

Retailers in the luggage, sports products, leisure & personal care product categories will witness the fastest expansion. Retailers benefitting from consumption upgrades, such as cosmetics and jewellery, will also continue to expand their brick-and-mortar stores. The strong rebound in social activity and gatherings witnessed since the beginning of 2023 has boosted growth in the F&B segment.

Trend 2: First-store economic support continues to increase

Several major domestic tier l and tier ll cities have extended first-store subsidy policies they have introduced in recent years. The scope of policy application and volume of subsidies has steadily expanded and improved, creating a fertile environment for domestic and foreign brands to enter new cities.

The resumption of domestic and foreign travel since the beginning of 2023 will compel brand site selection teams to accelerate the identification of potential new locations for new stores. The wider application of the first store incentive policy means that once a new brand establishes a presence in the domestic market, cross-regional first stores and flagship stores are likely to follow, while demand for concept stores will continue to thrive.

Trend 3: Upgrading the function and layout of physical stores will be needed to facilitate the shift to omnichannel

With China's domestic consumer market having entered the omnichannel era, CBRE expects the positioning of physical stores in the consumption chain to evolve from being a simple sales outlet to playing a role as a location to undertake omnichannel sales, customer service, community building, and brand culture experience. CBRE believes the establishment of brand store networks under omnichannel retailing will need to consider structural changes. Urban store networks, which have historically comprised a large number of standard stores with similar functions will need to be optimized. Retailers are also advised to concentrate resources to create multi-functional flagship stores in core locations, supplemented by a range of innovative store formats such as pop-up stores and concept stores

Trend 4: Adoption of sustainability practices prompts retailers to seek green locations

Among retail brands, the most commonly adopted sustainability practice is to use renewable energy, LED lighting systems, and environmentally friendly fitout materials in stores. CBRE has observed that a small number of retail brands have established dedicated sustainability teams to conduct green due diligence on properties during site selection. Projects that do not meet green standards such as energy consumption and environmental protection will not be selected. As more retailers implement sustainability strategies and adopt carbon reduction goals, properties and locations with environmentally-friendly attributes will become more sought-after.

Three factors activating retail property investment opportunities

During 2023-2025, accelerated expansion by retailers and the emergence of new consumption trends will drive the recovery of the shopping centres leasing demand. Under the omnichannel retail model, brick-and-mortar stores will remain at the core of the consumption chain, and consumer demand for high-quality shopping destinations and experiences will continue to grow. The recovery of offline consumption in 2023 will create cyclical opportunities to invest in China retail property.

Factor 1: Retail rents are approaching an inflection point

Average annual supply during 2020-2025 is forecasted to be 10% below that completed during the five years prior to the pandemic. As leasing demand continues to rebound, CBRE expects the overall vacancy rate to start to decline in 2024, which will see shopping centre rents in most cities bottom out. The proportion of new supply in core business districts will be 15% of the overall total. Considering that retail brands' store investment will be further tilted towards core business districts to facilitate the implementation of omnichannel strategies, CBRE expects occupancy and rents in core business districts to outperform the overall market.

Factor 2: Asset pricing is more attractive than before the pandemic

Following an improvement in leasing activity, cap rates stabilised in H1 2023 and asset prices are expected to bottom out in the next six to 12 months. Asset pricing is more attractive than before the pandemic.

Factor 3: Publicly offered REITs provide a new path for exiting retail property investments

In March 2023, the National Development and Reform Commission and the China Securities Regulatory Commission issued documents mentioning support for the construction of consumer infrastructure.

All kinds of retail properties, including shopping malls, community businesses, and farmer's markets, can now be included in the underlying assets of publicly offered RElTs. CBRE expects the creation of consumer infrastructure RElTs to help realise the "closed loop" of investment, financing, construction, management, and withdrawal for retail properties; facilitate the revitalisation of older retail properties; and activate related pre-RElT investment. Retail RElTs will also improve the asset liquidity of retail properties in lower tier cities

Sam Xie, head of research at CBRE China, commented: ”The years from 2023-2025 will be a critical period for the cyclical recovery of China's retail market and normalisation of domestic consumption. We urge investors to capitalise on this cyclical window by adopting the following investment strategies. They are advised to focus on major tier l and tier ll cities with continuous population inflows, giving priority to regional shopping centres of a certain size and outlets with retail destination characteristics. Thanks to the launch of consumer infrastructure public offering RElTs, investors can now avail of pre-RElT opportunities in lower-tier cities where there is a shortage of high-quality retail properties, community-based projects in tier I and ll cities, and farmers' markets. With China's urbanisation having entered the mid-to-late stage, institutional investors should therefore consider co-operating with asset-light commercial management companies to maximise returns.”