Article

Retail Market Insights

August 26, 2022 / By ,

Leasing recovery boosted as easing of restrictions continued – China remains an exception

As governments around Asia Pacific continued to ease COVID-19 restrictions and open international borders, business and consumer sentiment continued to pick up and the recovery in retail leasing activity was generally sustained over the quarter. Chinese cities such as Shanghai and Beijing were notable exceptions, given recent COVID-19 outbreaks in these cities and sweeping measures to contain further transmission amid a strict adherence to a zero-COVID policy, and hence dampening market sentiment and activity. Outside China, the region’s overall trend of moving toward living with endemic COVID-19 is expected to further boost the retail sector, though supply chain disruptions, inflationary pressures, rising interest rates and the emergence of new Omicron subvariants may pose a downside risk. While global macroeconomic challenges loom, the operating environment appears to be stabilising across much of the region. The aggregate Asia Pacific Retail Rental Index recorded its eleventh straight quarter of decline, though the magnitude of decline was marginal.

Greater China

As COVID-19 cases declined in Hong Kong, retailers gradually resumed their expansion plans, and supermarkets and F&B retailers were the major sources of leasing demand during the quarter. Nonetheless, lingering market uncertainty in the city resulted in landlords reducing face rents, and thus both high street and prime shopping centre rents fell. Shanghai’s COVID-19 outbreak disrupted the city’s retail industry, with physical stores suffering major losses during the pandemic. Some cash-strapped small brands closed permanently, and new leasing was delayed. After businesses resumed operations in June, luxury retailers led the market recovery on the back of strong pent-up demand. Rising vacancy and soft leasing momentum contributed to a citywide decline in rents. The disruption caused by the latest COVID-19 outbreak in Beijing hit the retail market heavily, and F&B tenants were among the hardest hit. Driven by rising operational pressures, more than 60% of closed stores surveyed were F&B brands, according to a JLL survey. As overall leasing demand largely dropped, landlords lowered rental expectations and offered rent concessions on new leases under increasing vacancy pressure, while providing support to current tenants by lowering rents and offering rent-free periods in order to stabilise building occupancies. Recovery in consumption in Guangzhou stimulated stable growth in leasing demand across various precincts. Alongside the emergence of China Chic, several domestic fashion brands established their first stores in the city. By contrast, international fast-fashion retailers continued to downsize. Rental polarisation remained a theme, with a few prime shopping malls on Tianhe Road scoring higher rents; conversely, suburban rents continued to edge down.

North Asia

New opening demand in Tokyo’s prime high streets was robust on the back of healthy luxury sales. Consequently, ground floor rents remained stable in both Ginza and Omotesando. Retailer sentiment in Seoul improved over the quarter, and high streets such as Myeongdong welcomed new tenants, resulting in overall increased high street occupancy. The removal of social distancing guidelines coupled with inflation led to rent increases for both shopping malls and high streets.

Southeast Asia

Leasing activity continued to gain momentum in Singapore, as the city’s transition to endemic COVID-19 and its pandemic preparedness further boosted retailer confidence and expansion. Hence, prime floor rent growth accelerated across all submarkets in the city due to falling vacancy and lifted retailer confidence. Bangkok registered positive leasing demand in the quarter, which was mainly related to the inflow of new tenants in existing retail spaces and newly opened projects. It was the first quarter since 1Q20 that net absorption was positive without any additional new supply. While prime gross rents rose slightly, the recovery in rents was at a slow pace, mainly due to poor consumer confidence amid the economic slowdown. Occupancy levels in Jakarta have remained high and demand remained somewhat supply driven. Net absorption mainly came from recently completed supply, and the strongest demand came from F&B tenants. As the pandemic situation seemed to be improving and foot traffic in prime malls started to improve, rents started to increase slightly. In Manila, accelerated new store openings as well as the relaxation of restrictions which drove increased mall foot traffic aided the recovery of leasing volumes. F&B, footwear, and clothing and apparel dominated new leases. As a result, lease terms have started to normalise and return to pre-pandemic levels, and hence retail rents have inched up.

India

Retail net absorption in Mumbai was relatively muted during the quarter since there were no new mall completions. Most leasing activity was recorded in the Prime South and Suburban submarkets. Overall rents in the city increased slightly, on account of improved retail leasing momentum and mall footfall rising to near pre-COVID-19 levels. Delhi’s Prime South submarket saw good leasing momentum, with international brands leasing space in prominent malls to open their first stores in the country. Leasing activity remained strong in the suburbs. Rents remained stable across the city’s malls.

Australia

Leasing demand in Sydney and Melbourne has been soft due to ongoing supply chain issues, labour shortages and increase in minimum wage, increasing the difficulty and cost of doing business. The rental declines recorded for the majority of sub-sectors in Australia throughout the pandemic have continued to stabilise in 2Q22, with the exception of CBD rents continuing to record steep declines.

Retail Outlook

As more countries shift toward living with endemic COVID-19, continued easing of pandemic restrictions should aid in market recovery, barring the introduction of renewed restrictions which could potentially be triggered by the emergence of new COVID-19 subvariants. The continued easing should lend support to greater leasing activity as retailer sentiment improves. Relaxations of cross-border travel restrictions should also help boost international travel and tourism, further fuelling the retail recovery around the region. Nonetheless, COVID-19 lockdowns in China, geopolitical tensions and uncertainty, inflationary pressures and rising interest rates may pose downside risks to the region.

 

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