With a rebound property market, where's the potential?
There are signs of a turnaround in China’s property market. Home prices increased sequentially for the second straight month, reversing nine previous months of decline. But developers are mindful that curbs on the residential property sector remain as they seek growth through retail and commercial property. Hit by cooling measures, Chinese home prices have been on a broad downward trend for the past two years. But average home prices in China’s 100 major cities inched up 0.3% last month on a month-on-month basis, according to data from the China Real Estate Index System (CREIS).
The CREIS added “the property market is still in the early stage of development compared with many first tier cities.” Urbanization rate in western China is less than the national average and demand is driven mainly by new family formation and upgraders. CapitaMalls Asia’s chief executive officer, Lim Beng Chee, said: “The minimum wages will increase. I think the government policy is to bridge the gap between the rich and the poor. To us, it is advantageous because our malls are targeted at the mid to upper segments of the population. “So the moment the middle class increases, they will spend money in our mall, and that obviously will come through our retailer sales and rental yield.” Mr. Lim added they are targeting to open Raffles City Chengdu in September.
He said: “It (Raffles City Chengdu) is already more than 90% leased out. If you go to the site today, tenants are busy fitting out. What’s exciting is that some of the Singapore brands are also going to open there, like Food Republic, Bee Cheng Hiang, and M)phosis. So this will bring something different to the shoppers in Chengdu.”
Other developers like Hong Leong Group are equally bullish on western China. Hong Leong Group (Singapore) chief representative in Chengdu, Wang Gongyi, said: “Right now, growth has not peaked in the west, it is still catching up with the coastal cities. Therefore there is still room to grow. There are no signs of a property bubble. We’re at least safe for the next few years.” In the western province of Sichuan, Hong Leong is investing around US$280 million (1.8 billion yuan) to build a complex comprising a hotel, shopping mall and business apartments.
A Singapore group led by Sembcorp along with Temasek, Keppel and Ascendas, is also partnering the local government to build a mixed-use business park there. Observers say mixed-use developments have grown in popularity in response to the clampdown on the residential market.
There’s no question that Beijing has taken measures to clamp down on rising property prices in China of late. Growth has been bleak in recent years compared with 2010, when property prices sky rocketed 95% in Tier 1 cities like Beijing according to CEIC. Although the article mentions a slight rebound in property prices over all in China, it also touches on two major trends happening in China; faster development in Tier 2 cities, and rising rental rates throughout China. How will these trends affect retailers?
The first is the rapid growth of Tier 2 cities like Chengdu, where there are several large projects going up this year. In addition to Raffles City, Chengdu, a Park Hyatt hotel, a COFCO’s Chengdu Joy shopping mall, as well as an Apple store are all opening this year in Chengdu according to Jones Lang Lasalle research. Chengdu is just one of the many cities that are seeing an increase in investment due to government controls on some larger cities. For retailers, this means opportunity in Tier 2 cities like Chengdu, with more office space and residential opening up, consumers are likely to follow. But which cities should retailers move into first? With so many large scale developments, how can retailers choose where to put their stores?
The second trend is directly related to the government crack down on rising property prices. Last year, Beijing showed a 40% increase in Grade-A office rent (PSM). For Q2 alone this year, Beijing has increased another 8.8% according to Jones Lang Lasalle. Shanghai, a more mature market increased 1.4% in Q2. With less new developments in Tier 1 cities, competition for office and retail space is fierce, driving up the rental rates. This makes it even harder for retailers to open profitable stores, as the risk of signing an expensive lease in a bad location increases.