China dominates the world in terms of shopping-mall construction, with some cities little-known in the West throwing up retail centers on a scope unmatched anywhere else in the world, as developers place high expectations on the spending power of the Chinese consumer.
In terms of shopping-center space under construction, China holds the top three spots worldwide, and accounts for 8 of the cities that make up the top 10, according to CBRE, which released the data as part of its global retail survey earlier last week.
The world’s busiest mall-construction hub, Tianjin, a major northeastern Chinese port city near the capital Beijing, has more shopping-center space under construction than the entire existing mall-space inventory of any single European city, apart from Paris and Moscow, according to CBRE.
About 16 projects are in various stages of completion, entailing 2.45 million square meters (26.4 million square feet), according to the CBRE data.
Shenyang, an industrial city about an hour’s train ride from North Korea, ranks No.2 globally in terms of retail construction. The provincial capital, which also serves as a commercial hub for trade with Russia, Japan and the Koreas, is building 2.18 million square meters of retail space in 18 shopping development projects.
Also bustling with retail construction, and ranking third globally, is Chengdu, the capital of Sichuan province in China’s southwest. The city, home to 14 million residents, is located near the region devastated by a major earthquake in 2008, and it has about 24 retail development projects underway, equivalent to around 1.89 million square meters, according to CBRE.
Wuhan a provincial capital of more than 10 million in China’s central interior, ranked fifth, or just slightly behind Abu Dhabi. Nearly one million square meters of retail developments are underway in the city, according to the data.
Sebastian Skiff, executive director at CBRE Asia in Beijing, said at first glance, the nationwide numbers appear to be a “scary” symptom of the overbuilding that has been a part of China’s rapid growth.
However, Skiff said a deeper look shows the situation is more of a catch-up story after a long period of underdevelopment.
"When you see what product is there to date, you will find relatively little in terms of modern retail space,” said Skiff, referring to the sparse offerings in China’s second-tier cities, which have been overshadowed by the rapid growth in Shanghai, Beijing and other better-known cities.
Demand unmet
The current project-development pipeline will help bring China into line with other Asian cities in terms of retail space per capita, although it will still lag behind international norms, Skiff said.
What’s important to keep in mind is the huge consumer appetite from among China’s growing middle class, and that the boom represents a wide gamut of projects, rather than a just single batch of shopping malls that could aggravate overcapacity in some areas, such as high-end offerings in central business districts, he said.
Many international retailers seeking to establish or expand their presence in China are having trouble accessing retail space, Skiff said, adding that he had “huge demand” from international clients who were “only interested if there was the right hardware.”
Colliers International’s executive director of valuation and advisory services, David Faulkner, acknowledged the mall-building rush in China and a shortage of quality retail space on offer in some areas, but he was less optimistic on the looming supply-demand imbalance.
"The question mark we all have is: Can the market really sustain this many shopping centers? The answer is probably not,” Faulkner said.
Projects undertaken by smaller local developers were more at risk than those led by outside groups from Hong Kong or Singapore, or even large experienced mainland China developers, as these groups had a better market understanding and the expertise to pull off a successful project.
Faulkner said he expects some developers to abandon partially completed projects as their funding runs out, repeating a pattern seen in residential and office developments, where developers either went bankrupt or otherwise had to shelve activity during a rough patch.
Bad timing
Many of the current batch of retail developments underway would have broken ground around 2009, when China loosened lending and other controls to help spur jobs as exports slumped amid the global crisis.
This sudden explosion resulted in a hefty set of projects all set for completion around the same time.
CBRE’s Skiff also expects some casualties among the real-estate developers as the supply overhang hits the market.
“It’s all coming on at the same time, so there will be winners and losers for sure,” Skiff said.
He believes hard times could lie ahead for developments that relied on a condominium-style or “strata-style” ownership scheme, a method favored by local developers which involves pre-sales to individual investors.
For the most part, these projects weren’t well planned and lack appeal to international retail brands, which prefer to deal with a single landlord that has management oversight of a entire retail complex, Skiff said.
Meanwhile, Colliers’ Faulkner said enthusiasm among developers had cooled significantly. Unlike conditions just a few months ago, many are no longer so confident about the future, and as a result are slowing work or delaying projects, pushing the timetable for completions back by five to seven years.
"The mood has changed,” Faulkner said, referring to what he said was a recognition among developers that growth was slowing, adding that even the Beijing’s top economic planner had lowered the nation’s annual growth forecast.
The theme of a deepening slowdown was also cited by Credit Suisse analysts in Hong Kong, who last week urged caution on investments related to the Chinese consumption theme, citing anecdotal signs of weakness.
Credit Suisse cut to neutral from overweight its view on stocks leveraged to China’s consumption of luxury goods, citing slowing momentum in Hong Kong watch and jewelry sales, in addition to softer growth in Macau casino revenues. It said the softer activity in those sectors served as a barometer of weakening spending by mainland China tourists.
Credit Suisse also cited the winding down of investment as a driver of China’s rapid growth. Investment outlays, which have recently accounted for about half of China’s GDP growth, were subsidized by Chinese depositors earning interest at less than the rate of inflation.
Recent data, however, showed deposit growth shrinking, which could point to diminishing funds within the banking system and the end of the era of low interest rates, it said.
Still, Credit Suisse said it remained upbeat on luxury-car makers, such as Daimler AG (HAJ:DE:DAI) (OTN:DDAIF) , saying the shares were a better value that other luxury-goods makers while also offering leverage to consumers in China and other BRIC nations.
China dominates the world in terms of shopping-mall construction, with some cities little-known in the West throwing up retail centers on a scope unmatched anywhere else in the world, as developers place high expectations on the spending power of the Chinese consumer.
