According to a new report by Jones Lang LaSalle, strong demand from domestic and international retailers pushed the overall vacancy rate down in 2011.
An increasing number of retailers have been competing in the Beijing retail market and several projects underwent re-positioning to strengthen their competitiveness.
In 2011, three shopping malls, China World Mall Phase III, Shine City and Galleria, opened inside the Fifth Ring Road in Beijing. The total GFA of these projects amounted to 140,000 sqm, an 82% y-o-y decrease in new supply. Due to the re positioning and upgrading of many core shopping malls, there is more available space for retailers in core areas and this impacted the leasing progress of new projects. In addition, many new projects which were due to open by year-end 2011 postponed their launch dates to 2012.
With the increasing disposable income of local residents, consumer demand for high-end products and services increased in 2011 and as a result, retailers of jewelry, luxury brands and supermarkets were busy expanding and refurbishing. In 2011, several shopping malls in the CBD, Wangfujing, and Xidan commercial areas upgraded their tenant mixes and shopping environments. A number of luxury brands and brands without an existing presence in the Beijing market took the place of under-performing brands. Around 40 luxury jewelers and clothing brands opened in China World Mall Phase III, 92 international brands opened in Shinkong Place and many creative high-end brands, such as MIUMIU and Alexander Wang, held their grand openings in the Village North. Furthermore, high-end supermarkets such as OLE and BHG have been expanding quickly in core commercial areas.
Favorable prices and popular designs meant that fast fashion retailers, such as UNIQLO, ZARA, H&M, and GAP continued expanding in Beijing’s shopping malls and community malls. In 2011, ZARA along with its sister brands, Stradivarius and Massimo Dutti, opened 7 new stores. GAP and H&M each plan to open 2 new stores in Beijing in 2012. Local fashion brands, Urban Renewal and MC Jeans, have also been busy selecting sites to facilitate expansion. As a result of this strong demand, net absorption in Beijing’s retail market reached 310,000 sqm in 2011.
With aggressive expansion by retailers, the overall vacancy rate maintained its downward trend in 2011, dropping to 10% in 4Q11, a 3.9% decrease y-o-y. Many mature projects which performed well raised their rents several times throughout the year, leading to an overall increase in the average rent in the Beijing retail market. Net effective retail rents reached RMB 701 per sqm per month (based on NLA), a 12.3% rise y-o-y.
In 2012, 14 new projects will be launched, adding 800,000 sqm of GFA to the total stock. These new projects are mainly located in the Chaoyang and Dongcheng Districts. Projects undertaken by international developers such as CapitaLand and Swire are experiencing good preleasing rates of around 70%-85%. Optimism about the future of Beijing’s retail market has meant that a number of luxury brands and brands new to Beijing have signed leasing contracts in the Wangfujing area. Jones Lang LaSalle predicts that retail demand will continue to be strong in 2012, while the growth rate of net effective rents will slow due to discounts offered in newly launched projects. Vacancy rates are expected to increase due to the abundance of new supply.
For retail development and store planning, volatility and uncertainty have a large impact. On average, leasing costs went up significantly in 2011, but new retail space coming online will slow cost growth on average. High-end retail space will continue to climb at the same rate as retailers jostle for prime locations. For Beijing in particular, and China in general, there is still a herd mentality that drives retail network planning. Rent levels in newer developments will certainly be lower, depressed by concern over lackluster traffic in the new developments.
We’re less sanguine about acceleration in retail sales growth. The macro economy has shown some signs of slowing and inflation continues apace. These factors will increase risk aversion by retailers, and likely lead to greater interest in prime retail areas. This in turn will lead to larger disparity in leasing costs for facilities of similar quality, but different location.
Beijing may be able to buck this trend better than Shanghai and other megacities. Demand for cosmopolitan shopping experiences in surrounding provinces is channeled through Beijing (and to some extent Tianjin). Shanghai on the other hand must contend with sophisticated retail development in many surrounding cities, from Nanjing to Suzhou to Hangzhou.
As rent and availability remain volatile in major Chinese cities, the smart retailers are taking a more analytic approach to both selecting cities and identifying target trade areas. Data and analytic tools are improving in China, meaning that a fact-based assessment of potential can provide a significant leg up on the competition.