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Shanghai's retail real estate market comes down to earth
Andrew Ness
While total 1998 retail sales in Shanghai increased 11 percent over 1997 to RMB147.1 billion ($17.7 billion), the city's retail price index fell by 3.9 percent, making 1998 the second consecutive year in which consumer prices registered negative growth in Shanghai. Nineteen ninety-seven also marked the first year since 1992 in which the city's annual retail sales turnover grew by less than 15 percent--a clear indication of slowing consumer spending.In part as a result of the sea change in Asia's economic fortunes, the entire Shanghai retail sector--including the retail property market--is experiencing a period of less buoyant growth. This decline, which began in 1996, has mirrored the declining rate of growth of both Shanghai's GDP and utilized foreign direct investment. Over the 1996-99 period, these rates of growth declined by 1.45 percent and 22.6 percent, respectively.
Though new retail properties continue to emerge, few buyers have come forward to purchase any of those properties offered for sale in recent years. Potential investors have been deterred from purchasing these properties as a result of the crackdown on domestic bank lending to the real estate sector, as well as the complex licensing issues involved in leasing retail units on a strata-title (individual ownership) basis. Under this arrang ement, the would-be lessor must possess a retail business license permitting the operation of the type of business the tenant proposes to undertake. Alternatively, the incoming tenant must already possess a retailing license for its proposed business. Would-be purchasers have also been reluctant to acquire these properties, primarily because of high purchasing costs, which tie up large amounts of the working capital typically required to run retail operations.
Of these properties, 10 are in Pudong New Area, while the 18 properties located in the Puxi District provide 66.7 percent of Shanghai's total new retail floor area of 434,922 sq m. Among the more notable of the Puxi facilities are Hong Kong Plaza, Jin Yuan Building, Central Plaza, Xujiahui Metro Entertainment City, Gang Tai Plaza, Regent Place, Bai Xin Mansion, and Golden Magnolia Place. The most prominent new facility in Pudong is the Jinmao Building retail platform. Xujiahui Metro Entertainment City and the Jinmao Building retail podium are among the larger foreign-invested retail properties to have opened in Shanghai to date.
These completions raised the number of large-scale shopping centers in Shanghai to 67. These shopping centers, each of which covers more than 10,000 sq m of retail floor space, include both standalone facilities and retail spaces embedded in larger, multi-use complexes. Shanghai's 24 large-scale, foreign-invested retail operations offer a total of over 725,000 sq m of retail space. Nine are standalone shopping centers, and the remaining 15 are retail components of multipurpose complexes. Meanwhile, most of the city's 150 medium-scale shopping complexes (each with at least 5,000 sq m in floor space) provide Shanghai retailers with commercial platforms attached to office or mixed-use developments. Of these medium-scale retailing properties, some 34 properties--with a total of over 794,000 sq m in retail space--are now foreign-operated, either as leased retail arcades or as individually owned shopping centers.
Despite the relatively active market in retail property acquisitions in nearby cities such as Hangzhou in Zhejiang Province, Shanghai presently offers relatively little retail property for sale. The few proper ties currently on offer are organized into a clear hierarchy according to desirability. Nanjing East Road, where the first modern retail storefronts in Shanghai developed during the late nineteenth century, is at the apex. The upper floors of newly completed retailing complexes along this narrow boulevard, which has already undergone partial conversion into a pedestrian mall, are still able to demand $6,000 per sq m. Retail property situated along Beijing East Road in the Huangpu District and Xinzha Road in the Jing'an District constitute the second rung in this hierarchy of desirability, with floors in new commercial complexes asking $4,520-$5,000 per sq m, respectively. Retail properties in more decentralized locations in the core inner city, such as Julu Road and Dapu Road, presently go for $3,000 per sq m.
The few major retail sales transactions that have taken place in recent years have typically involved bloc acquisitions of entire properties. For example, Japanese fashion retailer Itokin acquired the China Silk Building in 1997 for a total purchase price of RMB550 million ($64.4 million). This cannot be accurately described as a pure retail acquisition, however, since the building, with a gross floor area of 15,000 sq m, also provides office facilities. Itokin moved its China headquarters into the building shortly after making the acquisition.
One clear sign of consolidation in the Shanghai retail-leasing market and of the heightened competition among landlords for reputable tenants is that shopping-center owners have been finding it increasingly difficult to impose guaranteed minimum rents on tenants who have managed to secure "participating" leases. In a participating lease, the rent is payable on the basis of a fixed percentage of a given shop's retail sales turnov er. In a "guaranteed minimum" arrangement, during a given month the landlord may opt to take this percentage of turnover, or a certain fixed rental rate per sq m, whichever is higher. In Shanghai, however, landlords are now increasingly being forced to forego these guaranteed minimums altogether, or lower them to very nominal levels, in order to secure the caliber of tenants they have targeted.
Nonetheless, the difference between the fixed rental rate for a given location (in those instances where participating leases are not offered) and guaranteed-minimum rental levels is also a direct function of the desirability of the retailing space in question. The same hierarchy of retailing locations holds true with respect to the conditions offered in participating leases. Thus, for example, the greatest difference in rental rates is between fixed and guaranteed-minimum rentals for prime space in the Nanjing West Road and Huai Hai Middle Road. In these golden-mile shopping stretches, the differential between fixed rentals and guaranteed-minimum rentals is 30 percent and 45 percent, respectively. The width of these gaps shows the relative strength and high level of straight fixed rentals in these shopping districts.
This halt in expansion by department store operators, who represent the largest retail space occupants in the city, combined with a rise in the number of new retail properties on the market to raise vacancies in large-scale retail facilities significantly. Vacancies swelled from 28 percent in 1997 to 38.3 percent by year-end 1998. This vacancy figure could well have been higher, were it not for the fairly substantial take-up of retail premises by the retail departments of local commercial banks, brokerage departments of local security companies, and fast-food operators. These businesses have continued to expand despite the overall downturn in the Shanghai retailing environment. Vacancies are sure to rise further, however, because a substantial number of large-scale commercial complexes currently under construction are expected to be completed in the next two to three years.
As consumption patterns in Shanghai have become more sophisticated and as it has become easier for Shanghainese to travel abroad, imported luxury goods have lost much of their earlier mystique. Rather, the strongest demand for storefront space is from retailers targeting the local yuppie market through the merchandising of middle-market casual youthwear: US-run Lawman stores selling blue jeans; Hong Kong-owned Bossini stores selling casual men's and women's fashions; and both Chlaber of Taiwan and the PRC firm GMD merchandising casual women's youthwear. These trends are likely to continue in the near future.
The department store remains the dominant type of retail outlet, accounting for 47.5 percent of the city's total retail sales vol ume in 1997. The sluggish performance of the department store sector since 1997 thus has had a significant impact on Shanghai's retail property market. In the first half of 1998, the total sales volume of department stores in Shanghai increased by only 5 percent, while department store operators saw the progressive erosion of their net profit margins. According to local press reports, the average net, after-tax profit of department stores in Shanghai has fallen from 3.5 percent of sales turnover in 1991 to 1.3 percent by year-end 1997. With profit margins so narrow, small and medium-sized department stores can easily run into operational difficulties.
Indeed, 1997 witnessed the bankruptcy and closing of the state-owned Qian Cun Department Store in Yangpu; the Shui Hing Department Store on Huai Hai Road; the Dong Feng Wan Bang, at the foot of the Oriental Pearl TV Tower in the Lujiazui sub-district of Pudong; the Universal Department Store at the intersection of Yu Yuan Road and Jing'ansi; and the Friendship Gift Store at the intersection of Nanjing West Road and Shimen Road. Each of these five department stores failed for slightly different reasons.
The Qian Cun failed mainly because of its remote location and general mismanagement. The Shui Hing foundered because of weak management and the owner's lack of financial stamina to operate under the industry's present thin margins. The Dong Fang Wan Bang also suffered from its inappropriate location and management problems. The Universal lacked a clear theme or distinguishing characteristic. Similarly, the Friendship Gift Store failed to target its market and had an unsuccessful merchandising strategy.
Many department stores that managed to esc ape bankruptcy were forced to undertake major restructuring and re-positioning of their retail operations. For example, the Bao Da Xiang Department Store, located on Nanjing East Road, shifted its merchandising focus from fashion and accessories to wholesaling--evidently a successful move, since the lower-priced bulk goods have attracted customers. Similarly, the Mainland Department Store, situated near Dongfeng Road in Lujiazui, changed its format from that of a typical department store to one focused on home electronic appliances, and home decoration and construction materials. Other department stores went through management restructuring. Yaohan Nextage in Pudong saw its ownership transferred from bankrupt Yaohan of Japan to local backer Shanghai No.1 Department Store. Shanghai No. 1 completely and successfully shifted the store's merchandising orientation from luxury imported goods to affordable local goods.
Over the past five years, chain-store retail operations have also proven highly successful in Shanghai, and chain-store supermarket operations have taken the city's retail sector by storm. As of year-end 1997 a total of 919 supermarkets were operating in Shanghai, taking up 330,000 sq m of floor area and accounting for RMB10 billion ($1.2 billion) in annual retail sales turnover. Over the past three years, one new supermarket has opened every three days in Shanghai. The state-owned Hualian and Lianhua supermarket chains accelerated their rates of expansion by buying out a number of smaller supermarket operators. Each now operates approximately 400 stores in the greater Shanghai metropolitan area (see The CBR, September-October 1998, p.30).
Convenience stores are a second type of chain-store retailing format that has developed with amazing speed in Shanghai. In contrast to supermarkets, which are generally situated just outside residential subdivisions or development complexes, convenience stores tend to be located within residential developments and licensed to operate 24 hours a day. The typical convenience store is only about 100 sq m in size. Dairy Farm, one of Shanghai's leading convenience store operators, has opened over 100 Kedi stores to date. Hong Kong-backed Basics has opened more than 60 outlets across the city. Wholly domestically owned Baijia, as well as Sino-Japanese joint venture Hualian Lawson, have each opened more than 40 convenience stores in Shanghai to date. Supermarket operator Hualian, which only entered the convenience-store business in November 1997, jumped from eight convenience stores in Shanghai by year-end 1997 to 70 by year-end 1998.
For example, the recent southern extension of Metro Line No.1 from its original terminus at Jinjiang Amusement Park to Xinzhuang in the Minhang District has made Minhang a viable suburban commuter residential location for the first time. The elevated light railroad, which is scheduled to begin construction in 1998 and be completed by 2000, will connect Caohejing in the Xuhui District to the Changning, Putuo, Zhabei, Hongkou, and Baoshan districts, substantially enhancing these areas as suburban bedroom communities.
Shanghai's Retail Property Market, 1994-98
SOURCE: CB Richard Ellis Global Research Consulting |
These regulations recognized the legality of franchised chain stores, operating under a licensing agreement and paying licensing fees in exchange for the use of identity kits and operating technology. The regulations also allowed for non-franchise chain store agreements, in which individual retailers retain their separate identities, agreeing only to participate in a unified procurement and sales plan under the lead retailer's direction. This regulatory advance was followed in the first half of 1998 by the Shanghai Municipal Pricing Law, and the Tentative Regulations Concerning Prohibiting Low Price Product Dumping Activities. These regulations prohibited unfair price competition and provided some retail-sector pricing guidelines.
But development of the retailing sector in major urban centers is still hampered by regulatory restrictions on overseas investment in the retail and tertiary sectors. For example, China bans wholly foreign-owned retailing enterprises and overseas investment in cinema operation and film distribution. Removing such prohibitions would have a huge impact on the Shanghai retail sector, both by boosting the profitability of entertainment-led retailing complexes and accelerating the leasing absorption of retail space.
Further, if owners or developers of large-scale commercial complexes could seek not just department-store tenants to anchor their retail complexes, but also cinemas, bookstores, music and video chain stores, and cyber-cafes and computer arcades, retail sector leasing pro spects for the next several years would be less daunting.
Department stores, already fading as the major form of urban retailing, are expected to come under even greater pressure. Retail selling will increasingl y assume the format of chain-store operations targeting specific market segments. Smaller numbers of major chain-store retailing groups will centrally control these chains. These chain-store operators are increasingly employing retail technologies, such as computerized cash-register systems and point-of-sales information systems, which leave traditional state-owned department stores, with their inefficient distribution systems and lack of responsiveness to consumer requirements, even further in the dust (see p.46).
Underlying these structural changes in the market will be improvements in urban transportation infrastructure. The physical location of retailing facilities in Shanghai will thus become increasingly spread out. A multi-nuclear city structure will supplant the city's former mono-nodal urban structure, which has been supported by the older central-city retailing hubs. While the city's major shopping centers will retain their roles as centers of leisure, entertainment, and non-essential shopping, the newly ascendant hypermarket and supermarket chains will increasingly target satellite residential communities in suburban fringe areas. Such stores will focus on building market share through streamlined distribution techniques and economies of scale. These new, highly competitive chain-store operations are the single most important area for future growth in demand for retail facilities. As a result, vacancy levels wi ll remain generally high and retail rentals correspondingly depressed in the shopping centers clustered around the traditional, central-city shopping areas.
Staid Beijing Retailers Get a Shot in the ArmThe traditional Beijing shopping districts of Wangfujing, Xidan, and the Qianmen-Dazhalan area continue to be the city's main retailing hubs and entertainment centers. The districts have presented the same relatively undisturbed face to consumers since 1949. This relative calm was disrupted, however, not by the 1992 opening of the retail sector to foreign participants, but by the 1995 completion of the first large-scale shopping centers in these areas. In 1997-98, the market underwent yet another metamorphosis with the opening of a number of stores equipped with the latest in shopping-center management technologies and presentation formats.The opening of these more technologically advanced shopping centers dealt a blow to the city's staid, tradition-bound state-owned shopping sector, forcing these stores to adapt quickly to stay in business. These changes in one stroke robbed "golden-mile" locations such as Wangfujing of their formerly unchallenged superiority as shopping destinations. They also forced the antiquated Qianmen area to withdraw entirely from the ranks of the city's first-tier retail merchandising and shopping areas. The bright glare cast by this heightened competition served only to accentuate the defects of the older department stores, from the aged fixtures, fittings, operational equipment, and building systems, to the lack of effective marketing and promotional programs and a tendency to use monotonously similar merchandise mixes and presentations. In their rather clumsy attempts to capture a larger share of the mass consumer market, the only strategies of which these older department stores have generally availed themselves have been discounting wars and direct price competition. This price-cutting trend has had the direct effect of driving many of these department store operators to the wall, with as a many as eight major operators forced into bankruptcy in the 30-month period between year-end 1995 and mid-1998. These stores--the Wanhui Shuang An Commercial Centre, Tian Yuan Commercial Building, Kama Commercial Building, Asia TV Tower, Xin An Plaza, and Dong Ding Commercial Plaza--shared a number of weaknesses. Nearly all of these recently failed retailing complexes were located far from the prime shopping districts. They also all lacked a distinct theme, market niche or specialty, and made similar mistakes in targeting their market, following a merchandising strategy and mix at odds with the shopping requirements and income levels of the bulk of the households near their shops.
Pulling themselves up by their bootstrapsUnder the pressure of shrinking profit margins caused by the explosion of new shopping facilities, a number of department stores and shopping centers have completely restructured to survive in the market's leaner and more competitive conditions. Some of what were originally the city's largest state-owned department stores have already re-organized themselves as joint-stock companies in which the Chinese government now merely holds a shareholding interest. For example, the Wangfujing No.1 Beijing Department Store and the Chengxiang Trade Centre, which were formerly the city's two largest state-owned department stores, have seen their financial results improve markedly since reorganizing as joint-stock companies and listing on the Shanghai Stock Exchange. Another state-owned survivor emerged from the 1997 merger and consolidation of the assets of the Xidan Commercial Plaza Group with the Friendship Store Enterprise Group, another major joint-stock company in the sector.At the same time, other state-owned retailers have adopted the strategy of completely re-formulating their merchandising mix, sometimes entirely on their own initiative and sometimes in joint venture with an overseas partner. For example, the developer of the Hai Shen Building, on Huayuan Road in the Haidian District, was initially launched as a middle- to up-market department store, but was nearly forced to shut down because of mismanagement and mistakes in merchandising policy. The venture reversed its fortunes by entering into a joint venture with Malaysian department store operator Parkson, renaming itself the Haisheng Parkson Commercial Building and successfully repositioning its merchandising strategy to focus mainly on the provision of daily use articles and consumer necessities. Similarly, the Instec Commercial Building--situated along North Third Ring Road and initially operated as an undistinguished, middle-market department store--was also repositioned and renamed the Da Zhong Audio-Visual Equipment Commercial Centre. Finally, the Kama Commercial Building, which closed its doors in 1997, reopened after a reconfiguration in 1998 as the Nova Computer Plaza. As one of the first dedicated computer-products shopping malls in Beijing, the Nova Computer Plaza has met with a positive reception from Beijing's buying public, as its shops provide one of the widest range of computer-related equipment, software, and peripherals of any single shopping destination in Beijing.
Wangfujing gets a faceliftIn the context of such restructuring, it is no surprise that Wangfujing, Beijing's premier shopping street, is slated for a major renovation. The re-engineering and re-positioning of the image of this traditional shopping avenue had begun as early as 1992. Improvements include a massive effort to lay new fiber-optic cable lines for telecommunications, new water mains, power lines, steam pipes, and wastewater evacuation pipes, replacing the completely outdated utilities supply infrastructure beneath the street's surface. Substantial portions of the avenue have been transformed into construction sites. The construction work, however, has caused the volume of pedestrian traffic to drop off sharply and has seriously disrupted the commercial atmosphere, which is now considerably less vibrant than that of neighboring Xidan.The project to upgrade Wangfujing, though disruptive in the short term, is clearly favorable from the point of view of retailers, who will benefit from the refurbishing of the avenue's position as a modern shopping boulevard. With the completion of the upgrading efforts this year, Beijing officials are confident that Wangfujing Street will come to take on a status similar to Nanjing East Road and Nanjing West Road in Shanghai, and will stand out in Beijing as a shopping boulevard with a distinct international aura. But traffic along the renovated road will be limited to pedestrians and public buses, marking an important step toward Wangfujing's ultimate conversion into a pedestrian shopping mall--a move which is still under debate by the city's town planners, and for which no firm date has yet been fixed. --Andrew Ness |
Andrew Ness is departmental director, Global Research and Consulting, Greater China, CB Richard Ellis--a global real estate services company with a focus on brokerage, property management, facilities management, as well as mortgage banking, investment management and property appraisal.
Last Updated: 3-May-99