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RETAIL


SRTONG RECOEVERY IN FOOT TRAFFIC AND RETAIL SALES

 

FOOT TRAFFIC AND RETAIL SALES RECOVER

China retail market saw a rapid recovery in H2 2020, with the Consumer Confidence Index resuming growth and shopping mall foot traffic in July returning to a level slightly above that in the same month a year previously. Total retail sales registered y-o-y growth in August, with F&B sales returning to expansionary territory in October.

Despite isolated upticks in local cases in recent months, the retail market recovery will continue to accelerate on the back of growing economic momentum. CBRE expects total retail sales growth to reach 8-9% in 2021.

 

SHOPPING MALL RENTS LIKELY TO INCREASE FROM 2021

Despite projected strong retail sales growth in 2021, rents will require additional time to fully recover to pre-pandemic levels. The financial reports2 of listed developers show that the comparable rental income of shopping malls decreased by 10-30% y-o-y in H1 2020 due to widespread rental reductions, temporary store closures and delays in receiving rent payments.

The situation improved rapidly in H2 2020 thanks to sales and marketing promotions by landlords and rising consumption. This helped several leading malls register strong sales in Q3 2020, which offset the weaker performance in H1 2020. CBRE predicts that the further recovery of retail sales will support rental income growth for leading shopping malls in 2021.

Figure 13
click to enlarge

Note:
2 Financial reports published by developers such as Swire Real Estate, Joy City Real Estate, CR Land, Hang Lung Real Estate and CapitaLand Commercial China Trust
3 Total retail sales and F&B revenue are reported on a monthly basis compared to the corresponding period of 2019
4 CBRE Research Asia Pacific Retail Flash Survey, October 2020.

 

OMNICHANNEL HELPS BRICK-AND-MORTAR RETAILERS WEATHER THE PANDEMIC

 

OMNICHANNEL GROWTH CONTINUES APACE

The pandemic has transformed consumption habits worldwide and China is no exception. McKinsey’s China Consumer Report 2021 found that 45% of respondents said they selected new or alternate options based on convenience (ease of consumption) during the pandemic. With online sales becoming increasingly important, many retailers invested in omnichannel platforms: a trend expected to continue even through the pandemic has already been largely brought under control.

In addition to launching online stores, retailers have adopted new online features such as livestreaming sales events and offering reservations for store services. CBRE’s 2020 Asia Pacific Retailer Occupier Flash Survey found that 81% of retailers in China plan to integrate more social functions into their businesses in the coming years, with 67% stating that they will continue to invest in online retail.

Brick-and-mortar stores nevertheless remain key for both traditional retailers and new market entrants who originally began life online. Yixian, the parent company of Perfect Diary Cosmetics, was founded as an e-commerce retailer but opened several new physical stores in 2020. Yixian’s stores enable consumers to opt for either express delivery or store pick-up, with fulfillment from offline retail stores having been shortened by one day compared to delivery from logistics facilities. Consumers receive reward points through online shopping or interactive games, which can be exchanged for services in physical stores. Yixian recorded sales growth of 73% y-o-y in the first three quarters of 2020.

Venture capital investment in omnichannel retailers picked up strongly at the onset of the pandemic. 82% of venture capital invested into offline retail store openings in 2020 was directed into omnichannel retailers.

Omnichannel is also facilitating the entry of overseas retailers into China. With site inspections by overseas teams remaining suspended due to cross-border travel restrictions, more foreign brands are opting to open online stores to gauge market interest and test consumption power. This should eventually translate to demand for brick-and-mortar retail space after travel restrictions are lifted.

Figure -14
click to enlarge

Note:
5 The y-o-y change in sales is the latest financial period available in 2020. Some brands are estimated values.
6 6. The number of newly opened physical stores of some brands is as of the end of the first three quarters.

 

A NEW ERA OF RETAIL INNOVATION

 

NEW RETAIL OFFERINGS SET TO BOOST LEASING DEMAND

The growth of omnichannel is set to generate new leasing demand from retailers seeking space to promote their brand culture and values, position products across different sub-categories, and experiment with new store formats and functions.

  • New products: The circular economy and sustainability are increasingly influencing the fashion industry in terms of product design and marketing strategy. CBRE expects this trend to lead to additional demand for workshops and event space for displaying new technologies and products. Leasing demand from second-hand shops, especially those selling luxury goods, will also rise.
  • New positioning: Retailers are creating new offerings targeting niche markets. Heytea and Naixue Tea both recently opened new outlets where consumers can bring their pets. The latter has also launched Naixue PRO, which offers a café environment to host business activities.
  • New categories: Retailers are providing a more diversified offering across a broader range of retail categories. In 2020, MUJI opened its first convenience store in Beijing, to be followed by the first MUJI marché vegetable market in Shanghai in 2021. The brand also brought MUJI infill home services to China.
  • New formats: With social distancing in mind, several traditional restaurants have launched brands aimed at single diners and small groups. Leading hotpot brand Haidilao has set up several new fast-food outlets that host 1-2 people per table as well as a hotpot food supermarket
  • Omnichannel and new technologies: The rapid growth of F&B delivery services is generating considerable demand for space to host central kitchens and take-away shops. Sporting goods brands and 3C retailers are introducing new retail technologies and upgrading stores in core locations to flagship or concept formats.

Figure 15

 

RENTS FORECASTED TO RETURN TO
PRE-PANDEMIC LEVELS IN 2022

 

MOST NEW SUPPLY LOCATED IN NON-CORE AREAS

The suspension of construction following the onset of the pandemic led to more than 30% of last year’s new supply being pushed back to 2021. CBRE estimates that new shopping mall supply in China’s 18 major cities will reach 8 million sq. m. in 2021.

With just 10% of new completions due this year situated in prime locations, an undersupply situation is likely to arise in these areas, exacerbated by rising leasing demand. Of the remaining 90% of new supply located in non-prime areas, half will be in emerging districts without direct competitors. This should ensure occupancy remains healthy.

China’s quick containment of the pandemic and swift rebound in consumption has instilled confidence in domestic and foreign brands and is set to spur further investment in store network expansion this year. CBRE expects vacancy rates to stabilise in 2021, followed by a decline in 2022.

 

RENTS TO RETURN TO PRE-PANDEMIC LEVELS IN 2022

As supply and demand rebalances, shopping mall ground floor rents are expected to rise slightly in 2021 and then recover to pre-pandemic levels in 2022. The rental recovery will be stronger in tier I cities compared to tier II locations.

Operational capability will play an increasingly decisive role in rental performance. Same-store rental income of shopping malls operated by CR Land achieved strong y-o-y growth from May to July in 2020, just a few months after the onset of the pandemic.

Figure 16
Figure 17

 

PROACTIVE STRATEGIES REQUIRED TO ACHIEVE FURTHER RENTAL GROWTH

 

Amid the growth of omnichannel and new retail innovations, CBRE recommends landlords adopt proactive strategies in the following key areas to ensure they continue to attract and retail tenants and secure a return to rental growth.

  • Environment and Wellness: The pandemic has heightened awareness of health and wellness, making hygiene such as regular disinfection more essential than ever before. This is also leading to stronger demand for green building certification, with U.S. Green Building Council (USGBC) data showing that such applications from Chinese shopping mall landlords had risen by 80% y-o-y by the end of November. Although requiring a higher initial investment, green buildings can reduce costs through long-term energy saving. For example, the energy consumption of Parkview Green, a certified LEED Platinum mall in Beijing, is only 50% of that of a non-green building of a similar size. Authorities plans for 40% of large shopping malls in China to meet basic green building standards by the end of 2022.
  • Diversification and efficient space utilisation: Retailers’ new positioning, new categories and new store formats will require an evolution in the types of building facilities provided. Landlords are advised to create a more flexible offering featuring units with adjustable areas. The effective utilisation of public areas to incorporate pop-up stores and self-service cabinets can provide additional sources of income. CBRE also suggests landlords craft consistent and thematic strategies when leasing out these areas.
  • New approaches to charging rent: Landlords are advised to consider a broader range of indicators and criteria, such as foot traffic or social media engagement, to calculate rents. Although such approaches are still relatively new, technologies such as AI to measure foot traffic are already present in many shopping malls, which should help facilitate adoption in future.
  • Rebalancing tenant mix: With experiential retailers particularly vulnerable during the pandemic, CBRE recommends landlords review and adjust their tenant mix to reduce their exposure to this market segment. Partnering with retailers with strong omnichannel platforms is highly desirable.
  • Augmenting infrastructure and amenities: : Shopping mall landlords will need to improve technological infrastructure such as 5G and AI to meet consumer and retailer requirements. Other innovations include adding livestreaming rooms and, for community malls, introducing last mile distribution services.

China Real Estate Market Outlook 2021

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Henry Chin
Dr. Henry Chin
Global Head of Investor Thought Leadership
& Head of Research, APAC
Research
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Sam Xie
Head of Research
China
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