SHANGHAI: Chinese landlords are forgoing rent and paying to outfit stores for mass-market fashion brands including Zara and H&M, a bid to blunt the impact of a boom in shopping-mall construction that threatens to push up vacancies.
Preferential leasing terms were reserved until recently for luxury brands such as Louis Vuitton and Gucci, which are coveted because they bring shoppers into malls.
Now moderately priced labels are being enticed with offers as landlords work harder to fill shops, according to Cushman & Wakefield Inc and RET Property Consultancy Ltd.
Consumer demand is cooling as China’s economy slows and President Xi Jinping reins in lavish spending by officials.
Big mall operators, including China Resources Land Ltd and Hang Lung Properties Ltd, can withstand the slowdown at the expense of smaller ones such as Golden Eagle Retail Group Ltd, according to Credit Suisse Group AG and Haitong International Securities Ltd. Landlords focused on lower-tier markets will be under more pressure as smaller cities add retail space at a faster rate than larger ones.
“Competition in China’s commercial property market is very fierce, especially at those new malls at non-central locations in second- and third-tier cities,” said Carrie Liu, Shanghai-based general manager for development at Shui On Development Ltd, a subsidiary of Shui On Land Ltd. The company, which built the city’s Xintiandi restaurant, bar and retail district, has never offered subsidies such as free rents, Liu said.
Chinese developers built more malls and expanded into smaller cities as consumer spending and incomes grew, elevating China’s economy to the largest in the world after the United States.
Half of the 32 million sq m of shopping centres under construction around the world are in China, according to CBRE Group Inc. About 21 million sq m of retail space is expected to be completed by next year, a 38% increase in supply, according to broker Cushman, which tracks 20 cities in China.
That’s setting up a test for developers as retailers including LVMH Moet Hennessy Louis Vuitton SA and Gucci-owner Kering SA respond to slowing growth by scaling back expansion plans in the world’s most populous country.
Second-tier cities, including Chengdu, Shenyang, Hangzhou and Qingdao, may be stuck with the highest vacancy rates in 2014, according to Cushman. The financial hub of Shanghai, the capital Beijing and the southern industrial cities of Guangzhou and Shenzhen are considered the first-tier cities.
Vacancy rates in some less affluent cities could surge to more than 30% by next year from as low as 6.8% in the first quarter this year, Cushman forecasts.
“The problem we see today in China is that there’s really no proper planning,” Sigrid Zialcita, Singapore-based managing director for Asia-Pacific research at Cushman, said in a phone interview. “There are really a number of cities prone to having periods of oversupply.”
Mall space in China’s four major cities will grow about 40% by the end of 2015, while in 16 smaller cities it will double in the period, according to Steven McCord, China retail research director at property brokerage Jones Lang LaSalle Inc.
Developers of some new malls may struggle to reach even 70% occupancy, forcing delays in opening, said Michael Zhang, executive director and co-founder of Beijing-based RET Property Consultancy. — Bloomberg
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