What word would you use to describe the retail property investment market in China in 2016?
For Johnny Shao, JLL’s Head of Capital Markets for Shanghai and East China, it would be “buoyant.” In his opinion, the overall performance of the country’s retail property market has been highly impressive. Besides the active role of international investors, Chinese capital has started to increase and is expanding rapidly, including several record-breaking deals such as Everbright Ashmore’s acquisition of Jingan IMIX Park, Vanke’s acquisition of SCPG and China Life’s equity investment into Joy City’s portfolio. As the investment value of retail property in Tier 1 cities becomes increasingly evident, the market experienced explosive growth throughout 2016.
Since 2014, the retail property market in China has faced numerous challenges: The rapid development of e-commerce; the sluggish luxury market; changing consumer behaviour; a dis-connect in buyer and seller price expectation; and excessive supply.
“Over the past two years, these factors have caused investors to hold a prudent, wait-and-see approach while actively improving their management and operation capability,” says Shao.
“Meanwhile, many department stores and shopping malls have adjusted their business and tenant combinations, increasing the proportion of experience-oriented businesses.”
“During the second half of last year, these efforts started to pay off with some shopping malls gradually sustaining the adverse impacts from e-commerce with rent earnings growth and operations improvement. Consequently, investor confidence was restored, especially in Tier 1 cities such as Shanghai.”
Seen from the transactions this year, experienced investors favour two types of retail properties:
- Commercial property projects in the CBD: For example, in Q4 this year, JLL facilitated the transactions of Richgate Plaza in Xintiandi and Xuebao Shopping Centre on Huaihai Road. Both deals were small-to medium-sized properties located in the downtown CBD and requiring light operation and management efforts. The tenants are mostly prime large-scale flagship stores, financial institutions and well-known chain stores.
- Large regional mall projects in non-CBD areas: The size of these assets ranges from 70,000 square metres to 150,000 square metres and aim to fulfil the family’s one-stop shopping experience. In late November, Joy City Property Limited completed the acquisition of Parkside Plaza, a shopping mall located in Changfeng Ecological Business Park in Shanghai’s Putuo District, further proving the rise of local Chinese capital in the country’s retail investment market.
In September, Chongbang Group purchased 80 percent of equity in Jinqiao Life Hub for US$516.90 million, setting a record price for a retail mall in China and acting as a strong endorsement for long-term investments in the market, at a time when rumours of foreign capital withdrawing from China was circulating.
So, what’s next for the market after such a strong year?
Shao believes that, while investors will maintain their enthusiasm in Tier 1 cities, especially Shanghai, a lack of supply may slow transaction volumes. As a result, investors may look to prime retail properties in well-performing Tier 2 provincial capital cities where investment transactions are expected to markedly increase over the next 12 months.