Retail leasing momentum sees gradual improvement

• Retail footfall and consumption remained on a modest recovery trend. Food and beverage tenants led the recovery, with general retail sales also gaining some momentum. Retail leasing improved as a result, with Shanghai’s net absorption at 169,000 sqm, returning to positive territory.
• In addition to continued expansion by F&B tenants, fashion and lifestyle retailers also regained confidence. We observed significant demand from sportswear and sports equipment brands, skincare and perfume brands, emerging designer fashion brands, new energy vehicle (NEV) showrooms and smart home device retailers.

Citywide occupancy improves amid lack of new supply

• No new supply was delivered in Shanghai’s urban area in the quarter. Prime vacancy dropped 1.0 ppts q-o-q to 13.4% on the back of improving leasing momentum from retailers. Meanwhile, many brands remain selective about site selection and prefer prime projects in key locations. 
• Decentralised vacancy fell 1.2 ppts q-o-q to 12.1% in 2Q23 thanks to notable occupancy improvement in malls that had been hit hard during the pandemic. With landlords offering significant rental concessions, vacant spaces were backfilled quickly. 

Pace of rent decline narrows in prime areas

• The decline in prime ground floor rents decelerated, dropping by 0.1 ppts to leave rents down 0.3% q-o-q in 2Q23. Brands preferred projects in prime locations but were constrained by tight budgets. Decentralised rents fell 1.3% q-o-q as competition remained strong and landlords continued to compromise on rents to attract tenants. 
• No major en bloc retail deals closed in 2Q23. Yields in both the prime and decentralised markets further decompressed as investors still required higher risk compensation for retail property investments.

Outlook: Prime area to lead leasing recovery in 2H23

• We expect to see continued recovery in consumer spending and active leasing in the Prime market over 2H23, supported by fashion retailers, emerging NEV brands, outdoor and sports brands, and skincare brands. We still expect challenges for occupancy and rents in decentralised areas due to large supply pressure. 
• With increasing competition in the Shanghai retail market, brands and landlords are cooperating on strategies to meet fast-changing consumer demand, for example by holding pop-up events and exhibitions.