Demand for retail space weakens under a large-scale lockdown

• The retail sales of many sectors plummeted during 4Q22 due to a COVID-19 outbreak in Guangzhou. Retailers who suffered tremendous losses in 2022 ceased their expansion plans, waiting for the relaxation of COVID-19 restrictions and the recovery of retail sales. Thus, the overall leasing demand in Guangzhou’s retail market declined in the quarter.
• In November, several districts such as Haizhu, Liwan, Yuexiu, and Baiyun were under complete lockdown for COVID-19 containment. Many retail stores closed, and restaurants ceased to provide dine-in services. Consumer mobility was largely reduced, causing footfall and retail sales in those shopping malls to drop significantly in the quarter.

Suburban vacancy rate surges in 4Q22

• One prime mall, Xinda Jinmao Plaza in Tianhe district, entered the market in the quarter. Although several urban districts were under stringent lockdown, some landlords offered their tenants a few additional rent-free months to retain them. Therefore, the Urban vacancy rate only increased slightly from 6.8% to 6.9%.
• Divergent levels of vacancy were observed across Suburban buildings. Vacancy rates in districts like Panyu, where lockdown measures were relatively more relaxed, maintained their stability, whereas vacancy rates in more severely impacted districts such as Baiyun and Huadu soared. Thus, the overall Suburban vacancy rate rose from 7.1% to 7.7%.

Subdued retail sales continue to weigh on rents

• Some shopping malls were forced to shut down for more than one month due to preventative policies and staff infections. The revenue of retailers was severely impaired. Under such circumstances, landlords were more concerned with occupancy and were willing to offer lower rents with new leases as well as lease renewals.
• Investors’ offering prices dropped in the quarter as rental revenue fell, while keeping their fixed yield requirements when searching for retail properties. Owners became more determined to rapidly cash out on their retail properties and were more open to negotiations on price. Capital values of retail properties were therefore dragged down.

Outlook: Consumption is expected to recover

• Businesses are expected to return to normal in the near term, owing to the relaxation of COVID-19 restrictions. However, retailers might have to wait further for sales revenue to boom. They are likely to adopt a wait-and-see attitude towards their expansion based on the recovery speed of the economy and consumer consumption. Hence, it may still take time for leasing demand to bounce back.
• The following 12 months is expected to see approximately 500,000 sqm of new supply entering the market, which will be evenly distributed in Urban and Suburban areas. Demand is expected to gradually pick up with the increased footfall and business activity in shopping malls. The overall vacancy rate should drop, and the growth momentum for rents is expected to be gradually restored in the near term.