Holiday tourism and Hong Kong customers provide a boon

• Shenzhen saw historical highs for the number of tourist visitors and tourism revenue during the Chinese New Year holiday. In addition, the city witnessed a constant inflow from Hong Kong. This supported consumption in leisure, retail and food in shopping centres. As a result, F&B, services and entertainment expanded in 1Q24, accounting for roughly 57% of the total newly-leased areas.
• Fashion and lifestyle retailers were more conservative in 1Q24, as revenue was below expectations. However, the market also saw some prominent transactions. For example, Hermès leased an additional 1,000 sqm in The MixC to rebuild itself into the largest store in South China. Besides this, HAUS NOWHERE by Gentle Monster committed to a multi-storey store in MixC World, its second store in China.

Stable vacancy rates

• In terms of new projects, Uniway (Qianhai) had a grand opening in January, with a GFA of 41,000 sqm. City Mall in Futian underwent closure and repurposing. The total stock of Prime shopping centre space reached 7.2 million sqm by end-1Q24.
• The vacancy rate citywide decreased from 3.1% in 4Q23 to 2.9%. Although most existing projects had already achieved high occupancy rates, operators understood that a diversified and trendy tenancy mix would maintain footfall. Daily services, entertainment and other experiential businesses took up large spaces in some projects with high vacancy rates, helping with their destocking process.

Rents drop slightly

• As the market recovers, many landlords have adopted conservative and preferential rental strategies to attract renowned brands. Coupled with limited leasing contributions from the F&B and experiential sectors, in consideration of their relatively low rent affordability, rents saw a slight decrease of 0.4% q-o-q on a chain-linked basis.
• There were no en bloc transactions in 1Q24. The recent successful issuance of the first batch of retail C-REITs provided investors with a market reference, and combined with the rent performance, yields in both Urban and Suburban markets saw a slight increase. 

Outlook: A huge supply to come on stream this year

• The divergence in demand recovery between sectors and submarkets is likely to continue in the next 12 months. F&B is expected to remain the primary leasing demand source among all sectors. In addition, since the market risk premium of retailers is still high, leasing demand is expected to remain mainly concentrated in the core areas, such as Futian and Nanshan. 
• Around 940,000 sqm of new supply is expected in the next 12 months, with nearly 60% in emerging markets. Given the gradual recovery in leasing demand and increased market competition, the citywide vacancy rate may rise to 4.5% by year-end. The imbalance between supply and demand signals that landlords may continue to give concessions to tenants to maintain relatively stable occupancy.