The key to investing in China Retail Q4 2014

MarketScoreThe Key to Investing in the China

Retail MaRket china q4 2014 cBRE GloBal REsEaRch and consultinG

© CBRE Ltd. 2014

MarketScore | ThE KEy To InvEsTIng In ThE ChIna RETaIL MaRKET

Executive summary 1

Market summary 3

Market Overview 3

Opportunities and Challenges 5

Future Retail Market Trends 7

city Profile 8

shanghai: A Story of Firsts 8

Beijing: Focus on Value-added Assets 11

hangzhou: Tight Availability 14

chengdu: Emerging Retail Destination in West China 16

shenzhen: A Surprise Underperformer 19

shenyang: Oversupply Pressure Building 22

contacts 26

Contents

© CBRE Ltd. 2014 | 1china

MarketScore | The Key To InvesTIng In The ChIna ReTaIl MaRKeT

1. In January 2014 CBRE Research published Part I of its MarketScore series report focusing on the China office market. The report identified Beijing, Shanghai and Wuhan as the top three office investment destinations in China but advised investors to adopt a cautious attitude towards investing in a number of other office markets such as Tianjin, Ningbo and Qingdao.

2. Part II of the MarketScore series focuses on the China retail market. The report identifies 14 key drivers CBRE believes affect the performance of the retail property market in 17 major cities in China. These factors include investment liquidity, retail GFA per capita, historical vacancy, rental volatility, rental growth, future supply, retailer penetration, retail sales growth, consumption affordability and net yield.

3. Based on CBRE’s MarketScore ranking system, the top three retail markets in China from an investment perspective are Shanghai, Beijing and Hangzhou. Investors are advised to exercise caution when evaluating retail investment opportunities in a number of other cities such as Shenyang and Wuxi.

4. Shanghai tops the rankings due to it being the most liquid retail investment market. The city also enjoys robust rental growth and better consumption affordability. As one of the country’s two megacities, Shanghai is a preferred destination for international retailers looking to expand their footprint in China. However, the tight yields for retail investment are one noteworthy drawback.

5. Hangzhou is the capital city of Zhejiang, one of the wealthiest provinces in China. Due to robust demand from retailers and limited new supply, retail rents in Hangzhou have risen at a CAGR of 12.3% over the last ten years, the fastest rate of growth among the 17 cities tracked by CBRE. At the same time, vacancy has remained extremely low, falling to 1.7% as of Q2 2014. Hangzhou is a popular tourist destination and its retail market benefits greatly from visitor arrivals. However, one major constraint is the lack of investible assets. Most quality retail assets in the city are tightly held by listed retail operators or local State-owned Enterprises (SoEs).

6. Shenyang is one of the first cities in China where the retail market has become exposed to oversupply risk. City-wide vacancy has gradually declined over the last few quarters but remains high at 19.1% as of the end of Q2 2014. As the regional hub for Northeast China, Shenyang has attracted a significant number of international luxury and fast fashion brands to open stores. The city has the highest retail GFA per capita in China but has a further 1.5 million sq. m. of retail GFA in the pipeline scheduled to be completed in the coming three years.

executive Summary

© CBRE Ltd. 2014 Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

CBRe GlOBal ReSeaRCH aND CONSUltiNGThis report was prepared by CBRE China Research Team, which forms part of CBRE Global Research and Consulting—a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe.

Source: CBRE Research, Q4 2014.

chEnGdu“Fourth city”

shEnyanGoverSupply preSSure Building

hanGzhoutight availaBility a vacancy rate of 1.7%,

lowest number of the 17 cities surveyed

the number of outlets of several luxury brands has exceeded those in tier i cities such as Guangzhou and shenzhen; 3.2 million sq. m. of shopping centre space under construction

– the second most active city in the world

shEnzhEna SurpriSe underperForMer Per capita spending in hong Kong

nearly doubled in a year

overall vacancy stood at 19.1%

shanGhaia Story oF FirStS shanghai ranked 1st in china in terms of global retailer penetration;

shanghai accounted for 1/3 of the nation’s retail en-bloc transaction volume

home to 490,000 hnWis, the highest number in the country and 1/6 of the nationwide total in 2014

BEijinGStrong conSuMption oF

high-end retail goodS

MarketScore:the key to inveSting in the china retail Marketa stRatEGic fRaMEWoRK to EvaluatE thE PotEntial foR REtailinvEstMEnt acRoss 17 MajoR citiEs in china

top three destinations for retail investment in china:

1

2

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Market overview

Over the past thirty years living standards in China have improved immeasurably, opening up significant opportunities in the domestic consumption market and drawing massive interest from major global retailers.

Since the turn of the new millennium, economic growth in China has been driven by investment. At the same time, however, the country’s share of household consumption as a percentage of GDP (household consumption ratio) has declined, falling from 46% in 2000 to 35% in 2011. The implementation of a RMB 4.0 trillion stimulus package in 2008/09 further solidified the country’s dependence on investment-driven growth. Whilst the stimulus was effective in returning GDP growth to double-digit territory in the short term, it created a number of serious issues including excessive liquidity, high inflation, mounting local government debt, redundant construction projects and soaring asset prices. In response, the country’s new leadership of Mr. Xi Jinping and Mr. Li Keqiang stressed the need to transform the current investment-driven economy to a domestic-consumption-led economy. The central government’s “New Urbanisation Programme” and its target to double household income by 2020 will significantly enhance household consumption and consumers’ propensity to spend. This bodes well for the growth of the domestic consumption market, which CBRE believes will continue to record double-digit growth in the foreseeable future.

figure 1: Retail sales and average disposable income Per capita (2000-2013)

Market Summary

Per capita spending in hong Kong nearly doubled in a year

Source: National Bureau of Statistics (NBS), 2014. Source: National Bureau of Statistics (NBS), 2014.

China’s GDP has been growing at an average of 9.8% per annum over the past decade but economic growth and social development across the country remains highly imbalanced. The rapid transformation of the urban landscape along with increasing urbanisation and improving infrastructure are making the country an even more complex location for investors. The retail sector is notoriously opaque, adding a further layer of complexity for investors. To help investors navigate, CBRE has developed a strategic framework to evaluate the potential for retail investment across 17 major cities in China according to their risk and return potential. CBRE has identified a total of 14 key indicators that are the most relevant in driving retail market performance. To evaluate the attractiveness of retail markets CBRE covers in China, we have chosen a combination of macro indicators and retail-specific indicators. The key indicators identified include investment liquidity, retail GFA per capita, historical vacancy rate, rental volatility, rental growth, future supply, retailer penetration, retail sales growth, consumption affordability and net yield. The table below summarises the variables employed in this retail sector ranking exercise.

RETAIL SALES DISPOSABLE INCOME PER CAPITAGROWTH RATE (y-O-y) GROWTH RATE (y-O-y)

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figure 2: Key indicators for cBRE’s Retail Marketscore

For the base case scenario, CBRE has assigned a weighting of 35:65 to Risk and Return, which can be adjusted based on each investor’s risk appetite to produce different results. Based on the current MarketScore system, Shanghai, Beijing and Hangzhou rank as the top three destinations for retail investment in China. CBRE advises investors to exercise caution when evaluating investment opportunities in retail markets in Shenyang and Wuxi.

figure 3: Risk/Return Profile of 17 Major cities in china

It is important to note that the MarketScore rankings reflect the overall development of a market. Therefore, an excellent quality asset in a low ranking city might still be worth exploring, whilst an average property in a high ranking city may not. The CBRE MarketScore rankings provide a basic but sound framework for investors to conduct top-down analysis. CBRE also encourages investors to perform bottom-up analysis at the project level to assist them in forming and reaching their investment decisions.

RiSk SCORe

RetURN SCORe

• Rental Volatility• Investment Liquidity• Retail GFA Per Capita• Historical Vacancy

• Historical Rental Growth• Rental Growth Forecast• Development Pipeline• Luxury Brand & Fast Fashion Indicators• Retail Sales Growth• Consumption Affordability• Net yield

Source: CBRE Research, 2014.


HigherReturn

Higher Risk Lower Risk

LowerReturn

Return（Max=10）

Risk (Max-10)

ShanghaiBeijing

Hangzhou

Guangzhou

Chengdu

ShenzhenDalian

Wuhan

ChongqingQingdao

Tianjin

Ningbo

Nanjing

Suzhou

Changsha

Shenyang

Wuxi

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Source: World Bank, 2013.Note: * Household Consumption data is in 2012

the rise of the middle class and a broader consumer base China’s growing middle class is a burgeoning consumer base with increasing brand awareness. A survey conducted by McKinsey in 2013 projected that the upper middle class population as a percentage of urban households is expected to increase from 14% in 2012 to 54% by 2022 (Figure 5). The rise of this affluent upper-middle class will open up significant opportunities for investors in the retail market.

figure 5: share of urban households

69% 66%61% 59%

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HOUSEHOLD CONSUMPTION AS % OF GDP URBANISATION RATE

1 National New-type Urbanization Plan (2014-2020), the State Council of China, 2014.

opportunities and challenges

opportunitiesurbanisation as a key driver of retail market developmentAs discussed above, China is looking to transition away from export and investment towards a more consumption-driven economy. Household consumption as a percentage of GDP and the urbanisation rate are significantly lower in China compared to other developed economies (Figure 4) but are nevertheless on the rise. China's urban population has increased rapidly over the last three decades, with over half of all Chinese living in cities as of 2012. According to the State Council, the rate of urbanisation is expected to reach 60% by 20201.

figure 4: household consumption and urbanisation (2013)

29%16%

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2012 2022F

AFFLUENT UPPER MIDDLE CLASSMASS MIDDLE CLASSPOOR

Source: McKinsey, 2013.Note: The class classification is defined by annual disposable income per urban household in 2010 real terms. Mass middle class, RMB 60,000-106,000; Upper middle class, RMB 106,000 – 229,000.



Source: Shopping Centre Development – The Most Active Cities Globally, CBRE Research, Q2 2014.

Source: How Global is the Business of Retail, CBRE Research, Q1 2014.

retailers are going global and tapping into emerging marketsGrowing domestic consumption and new shopping centre supply are supporting the entry of global retailers to the China market. According to a report released by CBRE in 2014, China remains one of the most sought-after emerging markets for cross-border retailers (Figure 6). Beijing ranked sixth in CBRE’s global ranking of cities with the highest number of new retailer entrants (34) followed by Shanghai in ninth place (31) and Hangzhou in 40th (17). Tier I cities generally remain the preferred location for retailers entering China for the first time but there is an increasing trend of international retailers expanding in tier II and even tier III markets.

figure 6: number of new Entrants by Market (2013)

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FranceJapanChina

Hong KongGermany

United KingdomSingapore

TaiwanSouth Korea

PolandUnited Arab Emirates

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Czech Republic

challengesoversupply risksEight of the top 10 most active cities for shopping centre construction globally are located in China (Figure 7). According to CBRE data, new retail supply in Chengdu and Shanghai during 2014 and 2016 is expected to reach 3.3 million sq. m. and 3.2 million sq. m. respectively, marking them out as the top two cities globally for new retail construction. In tier II and tier III cities, pressure stemming from the influx of new supply has already started to weigh on market dynamics. Several new retail projects in Shenyang and Wuxi are reporting a vacancy rate of as high as 40%.

figure 7: shopping centre space under construction

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mn smShanghai, ChinaChengdu, ChinaShenzhen, China

Tianjin, ChinaIstanbul, TurkeyWuhan, China

Moscow, RussiaBeijing, China

Nanjing, ChinaGuangzhou, China

Greater Kuala Lumpur, MalaysiaHangzhou, ChinaShenyang, China

Chongqing, ChinaSeoul, South KoreaAbu Dhabi, U.A.E.

Qingdao, ChinaDalian, ChinaKiev, Ukraine

Cebu, Philippines



Strong competition from e-tailers Online retail sales in China totalled RMB 1,885 billion in 2013, accounting for 8% of total nationwide retail sales. Online retail sales in 2008 were just RMB 130 billion. Over the past five years online retail sales have recorded a CAGR of 71%. The emergence of e-tailing giants such as Taobao and JD has begun to weigh on sales in brick-and-mortar retailers. More consumers are gravitating towards online stores and are cutting back on their in-store spending. Many retailers including mid-range fashion, consumer electronics and supermarkets have had to evolve to adapt to this new trend.

lack of urban planningThe lack of systematic urban planning in many Chinese cities often has a negative impact on the retail market. As most local governments increasingly rely on revenue from land sales, most such authorities are keen to auction more land for development in the short term, despite the lack of long term urban planning. The influx of retail supply in emerging areas, which are usually associated with underdeveloped mass-transportation facilities or residential catchments, invariably results in newly opened malls being unable to attract sufficient numbers of shoppers.

Future retail Market trends

retailers embracing omni-channel platformsIn early-2014 domestic department store operator Intime Retail announced it would enter into cooperation with Alibaba. Around the same time, Apple, Muji and Burberry opened their online flagship stores on Tmall.com, following in the footsteps of UNIQLO, GAP and Forever 21. More retailers are broadening their operating model in China and looking to develop a “click-and-mortar” approach. They are aiming to build a seamless omni-channel experience by providing an integrated service to customers.

affordable luxury and F&B retailers driving demandAs the anti-corruption campaign remains in effect, luxury brands, particularly men’s apparel and watch stores, remain cautious towards expansion. In the women’s luxury sector, however, demand is more resilient. Here, retailers will likely expand at a slower pace or introduce more product lines targeting female customers. Affordable luxury and mid-range F&B brands are likely to drive demand due to the increasing presence of the middle class.

lifestyle consumption coming into play in shopping malls The boom in new shopping mall supply and competition from the e-commerce sector is prompting retail landlords to place more emphasis on asset enhancement through renovation, repositioning or tenant-mix upgrading. In order to keep their malls new and exciting and to improve footfall, mall owners are gradually introducing more experience-based elements such as F&B, cinemas, bookstores, indoor playgrounds for children, exhibitions and events. This is likely to result in a two-tiered market. Well-situated malls operated by a single and experienced landlord will outperform strata-titled malls as they are more capable of providing customers with an enhanced shopping experience.

government looks at the bigger pictureDue to pressure from new retail supply and higher vacancy rates in a number of cities, local authorities will likely implement a more systematic approach towards urban planning and will adopt a more regulated land use strategy. CBRE believes that local government will place a stronger emphasis on due diligence and look at the bigger picture when planning future urban zoning.



city profile

Shanghai: a Story of Firsts

Retail rents in Shanghai have increased by a CAGR of 7.9% over the last decade on the back of robust retailer demand. Vacancy has hovered at around 5-7%. The strong performance of the Shanghai retail market can mainly be attributed to the city’s increasing importance as an international financial hub as well as a burgeoning consumption market. The city’s GDP reached RMB 2,160.2 billion in 2013, the highest nationwide. Shanghai also tops a number of retail-related indicators such as resident population, retail sales, disposable income per capita, consumption expenditure per capita and visitor arrivals (Figure 8).

figure 8: shanghai Economic dashboard

Due to its strong market fundamentals, Shanghai is one of the most sought-after markets for domestic and international retailers. According to the retailer representation rankings revealed in the CBRE report How Global is the Business of Retail, Shanghai ranked first in China and fifth worldwide, ahead of Hong Kong, Paris and Singapore (Figure 9).

figure 9: Retailer Representation Ranking of Major cities

2013 city RanKinG

GDP RMB 2.1602 trillion 1

Resident Population 2,415 million 2

Urban Population 2,149 million 1

Total Retail Sales RMB 801.9 billion 2

Disposable Income per capita (Urban Citizens)

RMB 43,851 3

Consumption Expenditure per capita (Urban Citizens)

RMB 28,155 4

Visitor Arrivals 275.05 million 1

Source: Local Statistics Bureaus, Q2 2014.


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HangzhouShenzhenChengdu

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QingdaoWuhan



A separate survey conducted by CBRE China Research, which examined the number of outlets of the most high-profile luxury brands and fast fashion brands2 in each major city in China, found that Shanghai topped the rankings with 30 luxury outlets and 83 fast fashion stores (Figure 10). These findings are a reflection of Shanghai’s attraction to both high-end and mid-end retailers.

figure 10: Marketscore indicators: number of luxury and fast fashion outlets

As one of China’s two megacities, Shanghai has long been a preferred destination for international retailers entering China. In 2013, approximately 30 international retailers debuted in China by setting up their first shop in Shanghai. Most of these retailers chose to open their stores in prime retail hubs with strong consumer footfall and well-developed public facilities. One notable exception to this general trend is HUE, which located its first store in China in the Cloud Nine Shopping Mall in Zhongshan Park3, a relatively mature secondary area.

In 2014 a number of high-profile international brands have taken their first steps in China by setting up their first shop in Shanghai. For example, Old Navy, a brand operated by GAP, opened its first store in China along Nanjing Road West in March, taking up over 2,000 sq. m. of space. Elsewhere, Abercrombie & Fitch occupied 1,800 sq. m. at Jing’an Kerry Centre in April for its first China store and M&M’s opened its first flagship store in Asia at a 1,600 sq. m. space in Bailian Shimao International Shopping Mall in Nanjing Road East. CBRE believes that international retailers will continue to focus their China market entry plans on Shanghai, a trend that will support overall leasing demand.

Shanghai performs exceptionally well in the Risk category of the CBRE MarketScore system. This is due to its low vacancy, relatively low retail GFA per capita and, more importantly, strong liquidity. Shanghai has always been the most active and most liquid retail investment market among all cities covered by CBRE. Between 2005 and 2013, en-bloc retail transaction volume in Shanghai amounted to RMB 34.5 billion4, accounting for approximately one third of the nation’s retail en-bloc transaction volume during the same period.

Source: Company Information, CBRE Research, Q2 2014.

2 Luxury brands include: Hermès, Prada, Chanel, Dior, Tiffany, Gucci and Cartier; fast fashion brands include H&M, Uniqlo and Zara.3 Although Zhongshan Park is identified as a secondary area, it is a relatively mature sub-market in close proximity to Nanjing Road West area and with high footfall.4 Refers to en-bloc transactions over US$ 10 million in the retail sector.

FAST FASHION BRAND LUXURy BRAND

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Driven by the growing population in suburban areas as well as the trend for many retailers – particularly those in the fast fashion sector – to expand to decentralised areas, secondary retail areas in Shanghai have undergone rapid development over the past few years. Between 2010 and 2013 total retail stock in secondary areas of Shanghai grew by 67.1%, far outpacing core areas, which recorded an increase of 20.5%. Ground floor rents in secondary areas grew at a CAGR of 11.4% during the same period, compared to 7.9% in core areas. Vacancy declined from 15.0% in early-2010 to 11.3% as of end-2013.

CBRE believes the current “decentralisation” trend will continue in the coming years as a result of improving infrastructure, population growth and better connectivity in secondary markets. According to CBRE Research, a total of 3.3 million sq. m. of new retail space is expected to be delivered in 2014-2016 in Shanghai. More than 80% of this space will be located in secondary areas. This new supply will provide more expansion opportunities for both domestic and international retailers. Among secondary sub-markets, Wujiaochang, Zhongshan Park, Daning and Xinzhuang are more mature and will continue to attract new openings from international retailers. Other emerging areas such as Zhenru, Qibao and Hongqiao are likely to mature in the next couple of years.



Beijing: Focus on value-added assets

Beijing has historically been the other main focus for international retailers entering the China market. The city has comparatively strong consumption of high-end retail goods compared to other tier I cities in China. In addition, decentralisation is a more established trend in Beijing compared to other tier I markets. Of its total retail stock, just 20% is located in core areas such as Xidan, Wangfujing and the CBD. The remaining 80% is dispersed across a wide number of secondary sub-markets.

Due to the city’s political status and large population of affluent consumers, high-end consumption in Beijing has been growing rapidly in recent years. Beijing had a resident population of 21.15 million as of the end of 2013, a figure approximately 3.0 million less than Shanghai. However, total retail sales in Beijing in 2013 amounted to RMB 837.5 billion, the highest among all cities in China. A considerable proportion of this was driven by high-end consumption. Whilst the central government’s anti-corruption campaign introduced in 2013 has had a negative impact on the luxury retail market, demand from the city’s affluent population has continued to provide support to this sector. However, during the spring festival in 2014, the city government rolled out a comprehensive anti-corruption drive, leading to sluggish sales for luxury brands and high-end F&B operators. In January-February 2014 retail sales growth in Beijing slowed to 3.0% y-o-y, well down on the 10% growth recorded during the same period of 2013. Sales of clothing and accessories fell by 3.3% y-o-y. Nevertheless, with self-use demand remaining intact in the high-end segment, retail sales growth returned to growth of 10% y-o-y in March (Figure 11). The high-end segment is underpinned by the large number of high-net-worth individuals (HNWIs) in the city. According to the Hurun Report, Beijing is home to 490,000 HNWIs, the highest such number in the country and one sixth of the nationwide total in 2014.

figure 11: Retail sales Growth (y-o-y) in Beijing (2013-2014)

Source: National Bureau of Statistics, 2014.

Consumer behaviour in Beijing differs slightly to other tier I cities of Shanghai, Guangzhou and Shenzhen. Shoppers in Beijing tend to spend far less on food than consumers in other tier I cities. Spending on food accounts for just 31.3% of total consumption expenditure in Beijing, 3.7-5.5 percentage points lower than in other tier I cities. At the same time, however, shoppers in Beijing spend far more on clothing than in other comparable cities. In 2012 Beijing consumers spent 11% of their total consumption expenditure on clothing compared to figures of between 7.2-8.0% in the other three tier I cities (Figure 12). These statistics underline why Beijing remains a preferred destination for international fashion retailers expanding in China.

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As one of the country’s main economic hubs, Beijing continues to attract international retailers. According to CBRE’s How Global is the Business of Retail, Beijing ranked eighth worldwide in terms of global retailer penetration, with 43.4% of the 334 leading international retailers having a presence in the city. A total of 34 international retailers made their debut in Beijing (Figure 13) in 2013, a number three times higher than in the previous year.

figure 13: number of new Entrants at the city level (2013)

figure 12: consumption Expenditure of urban households in tier i cities (2012)

CLOTHING

HOME ELECTRONICS AND RELATED SERVICES

FOOD TRANSPORTATION AND COMMUNICATION

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Decentralisation is a more established trend in Beijing compared to other major cities in China. Around 20% of total retail stock is in core sub-markets such as Xidan, Wangfujing and the CBD, with the remaining 80% located in secondary areas (Figure 14). New shopping mall supply in core areas scheduled to be completed in the next two to three years is likely to help ease the pressure on vacancy. However, considering the limited land supply in core areas and authorities’ recent announcement that they would restrict new commercial property development within the 4th Ring Road, the “decentralising” trend is expected to strengthen further in the coming years. A number of major retail projects located in secondary areas developed by renowned mall developers such as Inter Ikea Centre Group, Wanda Group and CapitaLand are already under construction, along with numerous community shopping centres.

figure 14: Retail stock in Major cities


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Hangzhou is the capital city of Zhejiang Province, which is one of the most affluent regions in China (Figure 16). The disposable income per capita of urban citizens in Zhejiang reached RMB 37,851 in 2013 whilst bank deposits per capita of Zhejiang residents reached RMB 48,214 as of end-2012, the highest such rates among all provinces nationwide. As the capital city of the province, Hangzhou is supported both by local consumers and wealthy shoppers from affluent neighbouring cities such as Ningbo, Wenzhou and yiWu. The Hangzhou retail market also benefits greatly from an annual influx of around 100 million tourists.

figure 16: Resident Population and disposable income Per capita of urban citizens in Major cities in zhejiang Province (2013)


Source: Local Statistics Bureaus, Q2 2014.

hangzhou: tight availability

Tight supply distinguishes Hangzhou from other retail markets in China. The city has the smallest volume – just 1 million sq. m. - of retail stock of the 17 cities surveyed and an extremely low vacancy rate of 1.7% as of Q2 2014. Vacancy has averaged around 3.3% over the past decade (Figure 15).

figure 15: total Retail stock and vacancy Rate 2003 – h1 2014

TOTAL PRIME RETAIL STOCK (LHS) VACANCy RATE (RHS)

Huzhou2,916,000RMB 36,220

4,558,000RMB 39,087

1,142,000RMB 37,6464,949,000

RMB 40,454

5,428,000RMB 36,423

7,663,000RMB 41,729

8,844,000RMB 39,310

Population: 2,124,000RMB 28,883

2,122,000RMB 29,045

9,197,000RMB 37,852

6,038,000RMB 37,038

Jizxing

Hangzhou

ShaoxingNingbo

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JinhuaQuzhou

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Hangzhou’s strong appeal to tourists and the robust purchasing power in the region makes it an attractive destination for new market entrants (Figure 17). The city performs strongly across a number of retailer penetration indicators, ranking third among all Chinese cities in CBRE’s retailer representation survey, eclipsing tier I cities such as Guangzhou and Shenzhen. The city is also the most desirable of all tier II cities for luxury brands, according to CBRE MarketScore.

figure 17: new Market Entrants in hangzhou since 2013

Whilst a number of tier II cities are exposed to oversupply risks, Hangzhou continues to see very tight vacancy, driven by a lack of new supply and robust leasing demand. As a result, retail rents have continued to record steady gains. CBRE Research data shows retail rents in Hangzhou have enjoyed rapid growth over the last decade, growing at a CAGR of 12.3% per annum, the fastest rate of growth among all Chinese cities covered by CBRE.

There have been only a limited number of en-bloc transactions in the Hangzhou retail sector in recent years. This is primarily because there are very few investible assets available in the market. Most prime retail assets are owned by local large retail developers such as Intime, Hangzhou Tower and Jiebai. These developers tend to hold these assets for long-term investment purposes and are unlikely to sell. As a result, market liquidity is very low, which results in the city recording a low Risk score in the MarketScore model.

The supply situation in Hangzhou is likely to improve in the next two to three years. New projects developed by developers such as Wanda Group, Kerry Properties, Longfor Properties, CapitaLand and G. T. Land Group are scheduled to be completed. Retail clusters will begin to emerge in secondary areas such as Qianjiang New City, Chengbei and Binjiang. In view of the emergence of experience-based consumption and stronger competition from shopping centres, department stores in core areas will continue to evolve by re-positioning and embarking upon asset enhancement programmes. With more tradable assets and more investment opportunities available, the light liquidity in the Hangzhou retail investment market is likely to improve.

BRand stoRE location yEaR

Marks & Spencer Xixi InCity 2013

Wal-Mart Sam’s Club Xixi InCity 2013

Roger Vivier Hangzhou Tower 2013

MCM Hubin Intime 2013

Hollister The MixC 2013

Tsui Wah Restaurant Chengxi Intime 2013

Xibei Youmiancun Restaurant Chengxi Intime 2013

Hedgren Hubin Intime 2013

Miss Patina Hubin Intime 2013

Tory Burch Hangzhou Tower 2013

Collection of Style (COS) Chengxi Intime 2013

Michael Kors Hangzhou Tower 2014

New Look Jiebai 2014

Lampe Berger The MixC 2014

Ashley No. 88 Jiaogong Rd 2014

Source: Company information, CBRE Research, Q2 2014.



Chengdu is a gateway city connecting West China and the rest of the nation and attracts a large number of tourists each year. Tourist consumption also plays a strong role in shaping the city’s retail landscape. In line with growing consumption demand, net absorption has increased substantially over the past three years due to the expansion of both domestic and international retailers. CBRE Research data shows that net absorption reached 1.04 million sq. m. in 2013, a rate 1.57 times higher than in 2011. Despite the influx of new supply over the past three years, the overall vacancy rate has continued to trend downwards. As of June 2014, the overall vacancy rate in the city was just 7.6%.

chengdu: emerging retail destination in West china

Commonly referred to as the “Land of Abundance”, Chengdu is one of the most popular tourist destinations in China. The city is the regional hub for Western China and its GDP has been growing at a double-digit rate since 1998, reaching RMB 910.9 billion in 2013. As one of the most developed tier II cities, Chengdu has continued to upgrade its industry structure. As of the end of 2013, tertiary industry accounted for 50.2% of the city’s total GDP. Disposable income per capita of urban citizens in Chengdu recorded a CAGR of 12.1% per annum between 2009 and 2013, the third highest rate of growth among China’s major cities. Backed by these strong market fundamentals, most international retailers have chosen Chengdu as the location for their first store in West China. Consumers in Chengdu are regarded as “trend-chasers” and are considered to be particularly open to new retail offerings and concepts. Unilever has described Chengdu as China’s “Fourth City” behind Beijing, Shanghai and Guangzhou in terms of its retail market development and sophistication.

Despite lacklustre luxury sales across the country following the introduction of the anti-corruption campaign, international brands have continued to expand their footprint in Chengdu. Around 20 new entrants including Chanel and Giorgio Armani have opened stores in IFS, a landmark new shopping mall, which opened in Q1 2014. Self-use demand is a strong trend in the Chengdu luxury sector. The number of outlets of several luxury brands such as Burberry, Gucci, Louis Vuitton and Prada in Chengdu has exceeded those in tier I cities such as Guangzhou and Shenzhen (Figure 18). Chengdu places third after Shanghai and Beijing in the MarketScore fast fashion category. New entrants such as Abercrombie & Fitch continue to expand in the city and retailers remain upbeat about the outlook for the retail market.

figure 18: number of outlets of luxury Brands in Major cities

0

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20

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Shanghai Beijing Chengdu Shenyang Guanghzou Shenzhen Wuhan

Source: Company information, Q2 2014.

BURBERRY CHANELGUCCI LOUIS VUITTON PRADA DIOR



Despite the stable overall picture, performance has varied across the various sub-markets. Since the end of 2010 the overall market has seen a surge in the development pipeline. Total retail stock has expanded by 140% over the past four years, with 70% of this new retail supply located in secondary/emerging areas (Figure 19). Landlords of shopping malls in emerging areas (e.g. Tianfu New District) have therefore found it difficult to attract tenants. Some have leased space to F&B operators but such tenants can only afford to pay lower rents. Average rents in these areas have therefore remained low and vacancy rates have plateaued. In contrast, core areas such as Chunxi Road and yanshikou have recorded stable rental growth and low vacancy rates. This could be due to the healthy level of new retailer entries along with asset enhancement efforts by mall owners which have succeeded in attracting consumers. Given that several prime retail projects are slated for completion in the coming two to three years, more new entrants are expected. Core areas are therefore predicted to continue outperforming secondary locations.

figure 19: chengdu Retail stock by sub-market

Chengdu is a more liquid investment market compared to other tier II cities in terms of the number and total volume of retail en-bloc transactions. Notable transactions recorded in recent years include Zhejiang Commercial Group’s purchase of the South Railway Station project from Chengdu Transportation Investment Group for RMB 1 billion in 2012 and Perennial China Retail Trust’s acquisition of a 50% interest in Longemont Shopping Mall for RMB 2.3 billion.

The sizable development pipeline is likely to weigh on the market in the next few years. According to Shopping Centre Development – The Most Active Cities Globally conducted by CBRE in April 2014, Chengdu is the second most active city in the world, with 3.2 million sq. m. of shopping centre space currently under construction, slightly lower than the 3.3 million sq. m being built in Shanghai. A total of 3.9 million sq. m. of new supply is expected to come onto the market by end-2017, 75% of which will be located in secondary areas (Figure 20). Although more projects in secondary areas are scheduled to be completed in the next two to three years, CBRE believes that it will take at least three to five years for such areas to mature, considering their current level of development. The intense competition from new shopping malls is likely to suppress the investment return in such areas, although established malls in core areas will remain attractive. CBRE anticipates that tenants are likely to gravitate towards shopping centres operated by experienced mall operators.

TOTAL STOCK (2010) NEW ADDITION (2011-2012) NEW ADDITION (2013-H1 2014)


0

1

2

3

Core Area Secondary/Emerging Area

million sq. m.




figure 20: future supply Breakdown by sub-market (2014-2017)

Tianfu New District

46%

Other25%

Jinjiang New City8%

Zongbei1%

Chunyan10%

Guanghua - Shuangnan10%

CHUNYAN, GUANGHUA-SHUANGNAN AND zONGBEI——CORE AREAS

TIANFU NEW DISTRICT, JINJIANG NEW CITY AND OTHER——EMERGING AREAS



Shenzhen: a Surprise underperformer

According to CBRE’s MarketScore system, Shenzhen is the only tier I city that does not rank in the top four, coming in a mere sixth. The city’s lowly position in the rankings is surprising given its affluent consumer base. Disposable income in Shenzhen is the highest among all major cities in China and consumers’ average consumption power is among the strongest nationwide. However, a large proportion of consumer spending, especially in the high-end sector, is conducted in neighbouring Hong Kong. In addition, retail rental growth in Shenzhen is limited due to abundant new supply. Furthermore, the Shenzhen investment market is dominated by strata-titled purchases by wealthy individual investors, leaving fewer opportunities for en-bloc transactions. This results in relatively thin liquidity in the retail sector. Just seven retail transactions over US$10 million have been recorded in Shenzhen over the past nine years.

According to the Shenzhen Statistics Bureau, disposable income of Shenzhen residents reached RMB 44,653 in 2013, the highest among all major cities in China (Figure 21). The city’s economic development has been rapid, with its GDP growth rate exceeding the national average for most of the past 35 years. The city’s GDP currently ranks fourth among all Chinese cities. Its economy is driven by the high value-added serviced sector, which contributed 56.6% of total GDP in 2013.

figure 21: disposable income Per capita of Major cities in china (2013)

As Shenzhen is close to Hong Kong its citizens have developed a habit of shopping across the border. According to the Shenzhen General Chamber of Commerce (SGCC), over 43% of Shenzhen citizens shopped in Hong Kong between September 2012 and September 2013, a significant jump on the previous year when only 24% of the population reported doing so. During the same period, per capita spending reached RMB 11,567, nearly double the figure recorded in 2012 (Figure 22). Hong Kong is an attractive shopping location for Shenzhen residents as it offers more variety and better quality goods at cheaper prices. In the luxury sector, the advantages in product variety and price are even more significant. Luxury brands therefore tend to expand relatively slower in Shenzhen and open fewer stores. Though consider as a tier I city, the number of luxury stores in Shenzhen is just 20% of those in Beijing and Shanghai.

Sources: Local Statistics Bureaus, 2013.

0 10,000 20,000 30,000 40,000 50,000RMB

ShenzhenShanghai

GuangzhouNingboSuzhouBeijing

NanjingHangzhou

WuxiQingdao

ChangshaTianjinDalian

ChengduWuhan

ShenyangChongqing



Over the past 30 years Shenzhen has attracted a large number of young entrepreneurs looking to start businesses and work in what is a relatively newly established city but one which is full of opportunities. The average age of Shenzhen permanent residents was 33.6 in 2013, the lowest of all major cities in China. A large number of large domestic companies such as Huawei, Tencent and Vanke are headquartered in Shenzhen and attract young talent to work in the city. Against this backdrop, fast fashion brands, which mainly focus on young consumers, are flourishing. As of Q2 2014, Shenzhen has 14 UNIQLO stores and is home to the largest H&M flagship store in China, which takes up 3,100 sq. m. of retail space in the newly opened Wongtee Plaza. Shenzhen is firmly established as the top location for international fast fashion retailers looking to expand in South China (Figure 23).

figure 23: number of outlets of international fast fashion Brands

Sources: SGCC, Q4 2013.

figure 22: shenzhen Residents that frequently shop in hong Kong and annual spending

rMB 6,3812012 2013

24%43%

76%57%

2012 2013

BRand nuMBER of ExistinG outlEts oPEninG yEaR

shEnzhEn GuanGzhou shEnzhEn GuanGzhou

UNIQLO 14 11 2008 2009

H&M 10 7 2008 2010

MUJI 8 2 2011 2013

MANGO 7 4 2010 2011

zARA 6 3 2008 2011

GAP 4 - 2012 2014*

FOREVER 21 1 - 2013 -

Source: Company information, CBRE Research; Q3 2014Note:*The first store in Guangzhou is expected to open by end of 2014.

rMB11,567



Many large domestic developers were founded in Shenzhen and continue to be headquartered there. These groups selected Shenzhen as a place to start commercial development and operations for lease-holding purposes in order to gain experience for nationwide expansion. Developers rarely put such projects up for sale. Most of these shopping malls form part of a mixed-use complex development comprising of residential, office and retail facilities. In most cases, developers have more than recovered their investment from the sale of the residential units and hence are under no immediate financial pressure to offload their projects. Even if they do, they will usually ask an above market price, which makes it difficult for deals to be transacted. At the same time, with an active group of individual investors in the city, it can often be more lucrative to sell off assets on a strata-titled basis as opposed to doing so via an en-bloc transaction. These trends are reflected by the limited number of en-bloc retail transactions recorded in Shenzhen over the past decade.

Shenzhen’s relatively poor ranking in the MarketScore system is also due to its large volume of new retail supply. The rapid development of emerging areas alongside new metro lines and the increasing number of redevelopment projects in downtown locations saw Shenzhen retail stock increase at a rate of 18% annually between 2010 and 2013. An additional two million sq. m. of new retail space is expected to come on stream over the next three years. This will further intensify competition among shopping centres and limit short-term rental growth.



The development of the Shenyang retail market has accelerated since 2008. The city now has three core sub-markets, namely Mid Street, Taiyuan Street and Golden Corridor, as well as a number of emerging sub-markets, including Tiexi. Total retail stock amounted to 5.1 million sq. m. as of the end of Q2 2014, ranking the city first among all tier II locations. This is equivalent to a per capita retail space of 0.62 sq. m., a figure almost triple the 17-city average of 0.2 sq. m. Total stock is evenly split between shopping malls and department stores. By the end of Q2 2014, overall vacancy in Shenyang stood at 19.1%, a relatively high figure compared to other major cities in China. In addition to high vacancy, the Shenyang retail market is facing a number of other challenges, including:

local shopping habitsPrior to the debut of shopping malls in 2008, the Shenyang retail property market was dominated by department stores. This has resulted in a tendency for consumers to shop for clothing and footwear in department stores whilst shopping malls are mostly utilised as a destination for dining and entertainment. These deeply ingrained habits mean it will take some time for consumers to change their shopping patterns and for shopping malls to improve their retail performance.

lack of differentiation among shopping mallsEach retail hub in Shenyang is served by a large number of shopping malls and department stores. In addition to pressure from oversupply, most retail projects are similar to each other in terms of market positioning and tenant mix. This makes it challenging for these malls to attract shoppers and new tenants.

Shenyang: oversupply pressure Building

As one of the largest and most developed cities in Northeast China, Shenyang has the largest supply of retail stock in the region. According to the local Bureau of Statistics, Shenyang led other cities in the region in terms of per capita expenditure and retail sales in 2013 (Figure 24). GDP per capita reached US$ 14,245 in 2013. These statistics indicate a high consumption level as well as great potential for future growth. Shenyang has solid fundamentals underpinning the development of its retail property market.

figure 24: consumption Expenditure and total Retail sales (2013)

TOTAL RETAIL SALES

-

10,000

20,000

30,000

40,000

Shenyang Dalian Harbin Changchun

RMB

-

10,000

20,000

30,000

40,000RMB billion

Shenyang Dalian Harbin Changchun

DISPOSABLE INCOME PER CAPITA

CONSUMPTION EXPENDITURE PER CAPITA

Source: Local Statistics Bureaus, Q3 2014. Source: Local Statistics Bureaus, Q3 2014.



inexperienced shopping mall operators Whilst experienced retail developers such as China Resources Land and Hang Lung Properties operate a number of malls in the city, almost half of the shopping centres in Shenyang are owned and operated by inexperienced local developers. As of the end of Q2 2014, there was a total of 1.2 million sq. m. of shopping mall space operated by what CBRE would define as “inexperienced” developers. The vacancy rate for this space is as high as 39%, a sharp contrast to the 8% vacancy rate in shopping malls run by “experienced” operators (Figure 25). Inexperienced developers’ lack of operational expertise is mainly reflected in the mall’s positioning, marketing promotion, and property management, which combines to result in underperformance.

figure 25: shopping Mall Breakdown by operator type

INEXPERIENCED EXPERIENCED


latest retail trends entry and expansion by big luxury names The launch of new malls including MixC in 2011 and Forum 66 in 2012 has seen the entry of new luxury brands to Shenyang such as Hermès, Fendi, Miu Miu and Tiffany. At the same time, existing retailers such as Louis Vuitton, Prada and Gucci have increased their penetration in the market by opening more outlets. In addition, luxury car retailers such as Bentley, Rolls-Royce, Ferrari, Maserati and Aston Martin have all opened stores in the city. As the regional hub for Northeast China, Shenyang is also attracting regional consumers to shop for luxury goods.

rapid expansion of fast fashion brands Fast fashion brands have been expanding rapidly in Shenyang in recent years. As of mid-2014, Shenyang had a total of eight UNIQLO stores, five stores a piece for GAP and Zara and four stores each for H&M and C&A. Whilst the abundant supply of new retail space has facilitated the entry of fast fashion brands, retailers in this category have also identified Shenyang as a very important market for expansion. The rapid development of the fast fashion brands in recent years has also been underpinned by young consumers’ improving affordability. Most fast fashion brands prefer to expand in core sub-markets due to the mature business environment, stable foot traffic and ability to attract city-wide consumers.

0

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Stock Vacancy

million sq. m.



oversaturation in casual clothing sectorA major challenge in Shenyang is the homogeneous product offering, particularly in the casual clothing sector. Some brands in this sector have opened up to three or four outlets in the same sub-market. This has made it more difficult for shopping malls to attract tenants and has led to subdued demand as well as weaker market activity. In response, a number of shopping mall landlords have begun to introduce new casual clothing brands from Europe, the United States, Japan and South Korea. The likes of AS-BSN, Pancoat, E hyphen, snidel, MURUA, Thomas Dean and O’STIN have all entered Shenyang since 2013. O’STIN has been particularly active, having opened its first store in China in Shenyang and a further five stores in the city in the space of six months. The entry of new brands is helping to diversify the Shenyang retail market and is easing the oversaturation in this sector, to some extent.

emergence of childrens retail sector and activity-based retailAmusement parks, childrens’ clothing brands and kids’ education and training centres are steadily taking up space in shopping malls. Shopping centre landlords are seeking out such tenants as they usually take large spaces and can attract consumers and generate related consumption. The introduction of such tenants can rapidly increase occupancy levels, bring in additional foot traffic and boost consumption for F&B and other sectors. Sporting and activity-based retail is another emerging trend. Fencing halls, martial art clubs, dance studios, go-karting tracks, bowling alleys, archery halls, badminton halls and retailers offering other sporting activities are taking up space in major shopping centres. These retail formats provide a different shopping experience for consumers, attract shopper footfall and boost sales.

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CBRe GlOBal ReSeaRCH aND CONSUltiNGThis report was prepared by CBRE China Research Team, which forms part of CBRE Global Research and Consulting—a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe.

All materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including projections, has been obtained from materials and sources believed to be reliable at the date of publication. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. Readers are responsible for independently assessing the relevance, accuracy, completeness and currency of the information of this publication. This report is presented for information purposes only exclusively for CBRE clients and professionals, and is not to be used or considered as an offer or the solicitation of an offer to sell or buy or subscribe for securities or other financial instruments. All rights to the material are reserved and none of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without prior express written permission of CBRE. Any unauthorized publication or redistribution of CBRE research reports is prohibited. CBRE will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on information in this publication.

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The key to investing in China Retail Q4 2014