Back in March the US investigative journalism show 60 Minutes did a much talked about feature (in China real estate circles at least) about oversupply in real estate and so called ‘ghost cities’ in China. One focus of the segment was Zhengzhou, the capital of Henan Province, a city which the Beijing research team visits semi-annually to conduct fieldwork for REIS China, our subscription real estate data and forecast service.
Much of the show discussed the residential sector but they also touched upon retail. As ‘evidence’ for massive oversupply and seeming impending doom for Zhengzhou, the 60 Minutes reporter visited a future mall which we visit every time we go to the city. Orient Centre is located in the new CBD and although physically completed, it is, as they pointed out, completely vacant.
What the 60 Minutes team didn’t show, however, is another mall just 10 minutes’ walk from Orient Centre which is fully operational. Admittedly not the best mall in the world but a fully functioning one with tenants and customers nonetheless – far from a failure. Last month, we also visited two new completions elsewhere in the city comprising a total of around 340,000 sqm of prime retail space; one was fully occupied and the other just 5% vacant. Orient Centre’s problems then, do not seem to stem from lack of demand, but perhaps from ownership or administrative issues.
The part about Zhengzhou containing a residential ‘ghost city’ also doesn’t ring true with anyone who has been there. As a provincial capital, Zhengzhou is home to around nine million people. It is a vibrant, bustling city and some areas suffer from serious congestion. On our recent trip, I spent many hours stuck in traffic or walking through crowded streets and there were times when I wished it was a little more ghostlike!
Admittedly, parts of the new CBD still resemble construction sites but it is important to remember that the development of the area is a long-term plan and the centre of gravity in the city won’t shift overnight. The new high-speed railway station is now open, the first stage of the Zhengzhou subway system is nearing completion and several government offices have already relocated to the new CBD.
Having said all this, I would be the first to admit that Zhengzhou is going to receive, to put it mildly, a lot of new supply in the coming years. Over one million sqm of prime retail are expected to be completed in 2016 alone, although in our experience half of that supply is likely to be delayed for one reason or another. Some malls will likely struggle and some will undoubtedly fail. Experienced operators will need to differentiate themselves from the competition in order to survive and thrive and the net result should be improved shopping facilities for Zhengzhou’s consumers. I was talking with a colleague about this very issue last week and his view was that “… there will be winners and losers.” I agree.
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