Asia Pacific has been one of the fastest-growing regions in the world over the past decade, with its economic growth (4.4% per year) significantly outpacing Europe (0.9% per year) and the U.S. (1.7% per year). Much of Asia Pacific’s robust economic growth can be attributed to markets in emerging Asia, notably those in China, India, and Southeast Asia. In China’s case, we can see that this has played out in terms of increasingly strong purchasing power and rising household disposable incomes, which outpaced its peers in emerging Asia (Figure 1). While the median disposable income per capita in Greater China’s Tier 1 and Tier 2 cities increased by an average annual rate of 6.8%, the corresponding rates for India and Southeast Asia were 4.4% and 3.4%, respectively (i.e. both the effects of inflation and foreign exchange rate changes have been removed to better compare changes over time).

Figure 1: Median disposable income per capita

Note: Figures expressed in real terms and converted to USD based on the
exchange rate of the base year to facilitate comparison over time.
Source: Oxford Economics, as at June 2021

Such remarkable improvements in income levels have lent strong support to China’s retail market growth and development compared to 10 years ago, relative to other markets in emerging Asia. We looked at the retail market growth from the perspective of leasing demand for space in shopping malls, in terms of occupied space. What we saw is that retail space demand grew significantly across China’s cities — especially Tier 2 cities — exceeding the corresponding growth rates in Indian and Southeast Asian markets. This makes sense since both domestic and international retailers looked to tap into China’s increasingly affluent consumer base, helping drive demand for shopping mall space.

Figure 2: Distribution of annual occupied retail stock growth across cities (2011-2020)

Note: Cities covered in each sub-region include 25 Chinese Tier 2 cities,
5 Tier 1 cities in Greater China, 6 in India, and 6 in Southeast Asia.
Source: JLL Research, as at 1Q21

Nonetheless, similar to the office market, rental growth and investment returns, especially for retail assets in China’s Tier 2 cities, remained relatively muted, despite the above-average growth in leasing demand. As for office spaces, the fast-growing supply of new shopping mall stock during the 10-year period contributed to elevated vacancy rates and depressed rent growth levels. Local governments’ eagerness to attract companies to come to their cities resulted in favourable pro-business policies in the form of tax incentives for such companies. On the other hand, developers looking to capitalise in such a pro-business environment rapidly built new retail stock to capture the strong influx of demand.

Figure 3: Total retail stock growth vs vacancy rate across cities (2011-2020)

Note: Cities covered in each sub-region include 25 Chinese Tier 2 cities,
5 Tier 1 cities in Greater China, 6 in India, and 6 in Southeast Asia.
Each data point represents the vacancy rate and the year-on-year growth
in total retail stock of one city for one year.
Source: JLL Research, as at 1Q21

As elsewhere in the world, the COVID-19 pandemic has inflicted tremendous damage to retail real estate while helping accelerate long-term trends that were already underway before the pandemic — particularly the adoption of e-commerce. While China was already ahead of the rest of the world in online and mobile shopping, no doubt COVID helped drive its adoption even further. As consumer behaviour, technology and the retail sector continue to evolve, developers and investors in traditional brick-and-mortar retail will need to continue adapting to an ever-changing operating environment to survive, thrive and compete against both online and offline players. It may be in the form of increased omnichannel retailing, providing more experiential retail, or something else innovative. Those that succeed in doing this have the most to gain from an increasingly wealthy Asia.

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