TheChek News Flow

Property developers are set to build 8 million square metres of retail space in a sign of long-term confidence in the troubled but increasingly competitive market.

• Regulatory tightening on mainland Chinese developers means Hong Kong firms are pouncing on the opportunity to expand further into the mainland.
• Despite a property slump and subdued consumer sentiment in the mainland, a higher-than-usual volume of new retail space is set to launch this year.
• With most prime areas in major cities already built-up, growth will come from secondary neighbourhoods, smaller cities and formats for specific consumer types.

Earlier this month, Hongkong Land, the property developer behind the Landmark mall where Prada, Celine and other global brands operate stores, announced a bold new expansion plan beyond its namesake city.

It will devote $8 billion, its largest investment ever in a single project, to a luxury retail mixed-use scheme in Shanghai before building ten malls in six other cities across mainland China. Over the next five years, the firm intends to develop two new mall concepts with the company promising to merge premium retail with art while incorporating sustainability and nature-based features.

Unlike western markets where street-based shopping is common in major city centres, China is heavily mall-based. In 2022, 78 percent of first stores opened by foreign retailers in China were in shopping centres, according to CBRE’s latest China real estate market outlook. This means relationships with mall landlords can make or break a fashion brand’s business in some cities.

The real estate brokerage estimates that around 8 million square metres of new retail space will launch this year in China, an elevated number due to delays for around a third of last year’s retail pipeline from Covid-19 shutdowns.

Despite subdued consumer sentiment in some quarters and broader economic challenges including a property slump, many businesses are confident that the mainland Chinese consumer growth story remains intact for the long-term — especially those in the luxury sector where the repatriation of spending continues to reshape the industry. And while the pace of growth might have slowed for some brands, middle-class consumption is still set to rise.

Hongkong Land is not the only developer to dedicate large sums of money to the mainland. Tim Blackburn, chief executive of Swire Properties, said in March the firm would invest HK$50 billion ($6.4 billion) to grow its Taikoo Li and Taikoo Hui mall brands in tier-one and emerging tier-one cities, aiming to double the firm’s gross floor area in mainland China over the next decade.

“Taikoo Li Xi’an will be our next major landmark, alongside our new retail-led project in Sanya (in Hainan). We also remain focused on expanding our presence in the Greater Bay Area and we have been making encouraging progress in Guangzhou and Shenzhen,” he said.

In recent years, the mall developer mix in the mainland has changed in terms of character and origin. It was Hong Kong-based incumbents who helped initiate mall culture before many mainland players got in on the game. But since last year, mainland developers have been hit by regulatory tightening on debt levels, hampering their ability to start or even finish projects, enabling Hong Kong-based developers to pull further ahead. Some local firms are looking to offload parts of their mall business.

In May, Dalian Wanda Group was reportedly weighing the sale of as many as 29 of its shopping malls, even in affluent cities like Shanghai and the surrounding areas of Jiangsu and Zhejiang. The firm was once seen as a high-quality name and operated 473 malls at the end of last year.

Still, some mainland firms are in expansion mode. State-backed China Resources Land’s MixC malls, which counted 66 locations last year with 10 more on the way in 2023, are influential outlets for international brands wherever they build. Regardless of recent challenges, the mall landscape tends to skew hyper-local in some cities and provinces, such as Nanjing where local developers Deji Group and Golden Eagle have built namesake shopping centres.

In the duty-free mecca of Hainan, it is state-backed China Duty Free which is the dominant player with two huge shopping centres in both Sanya and the provincial capital of Haikou, but since the island will lower tariffs province-wide by 2027, non-travel retail developers are making plans to set up shop there too.

As Hongkong Land expands its footprint in mainland China, it will go up against many decades-old competitors from its home market. In addition to Swire’s malls in cities like Chengdu, there is Sun Hung Kai, which was responsible for APM, IFC and ICC in both Beijing and Shanghai; Adrian Chi-Kong Cheng’s New World Development, which owns a collective of art-focused K11 malls; Xintiandi, which pioneered the idea of outdoor malls in mainland China; and Hang Lung, which owns the series of 66-branded malls including Plaza 66, a top draw in Shanghai for luxury spending.

In a market that has become far more competitive in recent years, Hong Kong developers increasingly find themselves pitted against developers from Asian countries too. Malaysia’s Kerry Properties and Singapore’s CapitaLand are two examples. The latter’s marquee project in China is the Raffles City in Chongqing, which opened its first phase in 2019, marking a significant upgrade for the city’s retail scene with 40 percent of its tenants new to the market.

Mall development is not without its challenges, even for those in expansion mode. A major Swire project in Shanghai, Taikoo Li Qiantan in Pudong, opened at the end of 2021 and struggled with its leasing while the city faced waves of lockdowns, although it did eventually reach 99 percent occupancy by the end of last year.

Hang Lung Group chairman Ronnie Chan said its luxury focus helped insulate it from the turmoil of the past year. At its Plaza 66 mall, over 120 luxury brands are housed under one roof including the Gucci and Valentino flagships. Despite being shut down for two months, it still welcomed new openings by De Beers, La Mer, and Bogner.

“During the pandemic, whenever there was a relaxation of quarantine rules, which came intermittently, shoppers rushed out to buy… As they had no way of knowing when the next opportunity would return, they only visited the best stores in town for the brands of their choice. Given our premier market position in almost every city where we have such malls, we probably benefited much more than others,” said Chan.

In aggregate, mall revenue from the 11 properties the firm operates dropped 3 percent last year but its most high-end malls fell just 1 percent, while its more affordably focused portfolio fell 4 percent.

CBRE predicts that overall vacancy rates in China will first peak then decline in 2023 falling eventually to around 7 percent by 2025, a similar level to 2021. Average shopping centre rents are expected to stabilise and increase slightly by 1 percent in 2024 and continue to grow in 2025. However, reflecting the growing scarcity of good locations, just 16 percent of new supply coming online between 2023 and 2025 will be located in the core business districts of the 18 major cities tracked by CBRE.

According to Chan, in all mainland Chinese cities outside Shanghai and Beijing, at most three stores of any luxury brand can currently be sustained.

“As the economy further grows, perhaps one day a fourth store can be opened in tier-1.5 cities such as Hangzhou and Chengdu,” he said. “And if there is more than one top-end mall, then shopping will disproportionately flow to the market leader. The gap between the top-ranking mall and the second is usually quite large. This is why we always strive to be the number one in each city we operate.”

Newer developers like Urban Revitalization Force, which is constructing half a dozen TX malls in the country, have taken a different approach by carving out a niche: youth culture. It opened TX Huaihai Youth Energy Center in Shanghai in 2019 and this month, opened The Box in Beijing. Each location is highly conceptualised.

Its Shanghai location included collaborations with fashion creative agency Seiya Nakamura 2.24 and TeamLab, the Japanese digital art studio, while its latest location in Beijing includes basketball courts and a heavy emphasis on music and lifestyle elements. The Box is also pet friendly, a rarity in China, but reflective of growing pet ownership among China’s Millennials and Gen-Z. The firm also put electronic nightclub Lantern and, Loose, a prominent local fashion multi-brand boutique, under the same roof.

Although youth unemployment has recently turned worryingly high in China, Dickson Szeto, the Hong Kong businessman behind Urban Revitalization Force, is undeterred.

“You have to give them a reason to buy,” he said. “If you just focus on cheap, it doesn’t work because being cheap or the cheapest is not a good attitude or direction. You have to design and structure something which is cool, very stylish and with lots of personality but the pricing is easy.”

Szeto is also making investing in local brands part of the TX brand. “I believe in homegrown designers, we are focused on building a new platform for [them] where we give them more support, on supply chain all the way to meeting consumers,” he said.