This Sept 1, 2014 photo shows people at the Sanya Haitang Bay International Shopping Mall in Sanya, south China's Hainan province. (GUO CHENG / XINHUA)
Mainland shopping malls are shrugging off the impact of e-commerce and recovering strongly on back of healthy retail sales, multinational bank DBS says.
Shopping malls hit headwinds in 2014 to 2015 as brick-and mortar stores took a hit from the e-commerce boom while luxury-item sales declined.
Figures from DBS Vickers, the securities arm of Singapore-headquartered bank DBS, show retail sales at the top 50 Chinese mainland retailers dropped 7 percent year on year as of August, 2014.
Properties sold to homeowners are more profitable but this is highly cyclical, more developers will want stable cash flow from shopping malls to hedge the risks.
Carol Wu, Executive Director and Head of Research, DBS Vickers
Online retail will continue to sustain a double-digit compound annual growth rate, the broker said. But experienced mall landlords have worked out ways to mitigate the impact.
“Years ago fashion apparel comprised 70 to 80 percent of the tenants in a shopping mall, the percentage has been lowered to 50 percent as shopping malls are shifting to experiential consumption and more service providers, such as tutorial schools and beauty salons, are moving into malls,” said Carol Wu, executive director and head of research in DBS Vickers.
The brokerage firm said number of malls in China’s top 30 cities will grow from the current 998 to 1,445 in 2019, but Wu said market concerns that the mainland had too many shopping malls were not solid.
“Thirty to 50 percent of the new malls will be delayed or cancelled due to construction delays and leasing difficulties, if a mall can’t secure enough tenants they won’t open in the end. Policy is also encouraging the conversion of retail malls to office spaces,” Wu noted.
Mall penetration in the mainland remains low, DBS said. Based on urban population the penetration rate is less than 60 percent.
Growing buying power, especially in tier-1 cities, strongly supports retail recovery. Disposable income per capita in tier-1 cities reached more than 50,000 yuan last year, representing 8.8 percent more than the previous year. Recovery at retail malls is mainly driven by strong buying power in tier-1 cities, Wu said.
To cash in on rising consumption demand in tier-1 cities, dozens of foreign luxury brands have narrowed the price gaps to prompt domestic buying in the mainland.
Chanel, for example, narrowed the price premium between luxuries sold in the mainland and United States to 15 percent.
Four types of shopping mall will be outperformers in the recovery, DBS predicted: existing luxury malls in tier-1 cities; mass shopping malls in suburban areas of tier-1 cities that will benefit from a rising population in suburban areas because of decentralization; quality malls with first-mover advantage in lower-tier cities and those with good management.
The broker is betting on mainland shopping malls over their Hong Kong peers, saying landlords from mainland malls collect lower fixed rent but turnover rent, buoyed by strong sales of its retail tenants, will boost the landlords’ income. In Hong Kong, however, the rental structure relies heavily on fixed rent. DBS estimated landlords of major mainland shopping malls will have a 10 percent growth in rent this year.
DBS is bullish on leading players in mainland shopping malls including China Resources, Longfor and Initiate Joy City. The brokerage has just upgraded Lang Lung Property to “Buy”.
More real-estate developers are moving into the shopping-mall business, Wu said. Country Garden, for instance, a leading residential property developer based in Guangdong, is poised to expand into shopping malls, she disclosed.
“Properties sold to homeowners are more profitable but this is highly cyclical, more developers will want stable cash flow from shopping malls to hedge the risks,” Wu said.