Pandemic concerns continue to weigh on consumers

• Continued pandemic concerns weighed further on consumer sentiment, impacting Shanghai’s retail market. Net absorption fell to a negative -140,700 sqm in 4Q22, with absorption for the full year coming in at -523,100 sqm. The F&B, fashion, children’s education, and cinema sectors all faced the impact of the pandemic in 2022. 
• A few sectors remained resilient, contributing to new take-up demand. In 4Q22, new leases mainly came from tenants in sectors like luxury, skincare and perfume, sports apparel and equipment, new energy vehicle (NEV) showrooms, pet services, among others. Competitively priced fast food shops and bakeries were also embraced by consumers.

Annual supply falls to lowest level since 2004

• Two prime malls, Zhangyuan and MOHO, delivered a combined 100,000 sqm in 4Q22. Zhangyuan opened its west section after four years of renovation, allowing its historic buildings to house a range of well-known international brands. Prime area vacancy increased 0.6 ppts to 14.3% in Q4. Over 2022 as a whole, four prime malls delivered 159,000 sqm.
• The Aspire project added 30,000 sqm to the decentralised market. Continued impact from the pandemic on demand led decentralised vacancy to rise 0.9 ppts to 13.2%. For the full year of 2022, three decentralised malls delivered 153,000 sqm to the market. 

Rental declines ease in 4Q22

• The decline in prime ground floor rents narrowed to 1.3% q-o-q in 4Q22, with full year rents down 6.8% y-o-y. Decentralised ground floor rents fell 1.5% q-o-q in 4Q22, with rents ending the year down 8.0% y-o-y amid pressure from rising vacancy.
• Market uncertainty has led investors to require higher risk compensation for retail property investments, and transactions are expected to be limited over 2022-2023. As a result, city-wide market yields continue to decompress as investors’ risk appetites decline.

Outlook: Retail market likely to recover in 2023

• The recent lifting of pandemic restrictions and the subsequent surge in cases likely means seeing further impact from the pandemic in the coming months. Brands will likely adopt a wait-and-see attitude until daily life and business return to normal, probably in 2Q or 3Q23. Leasing momentum is thus likely to pick up within 2023.
• Decentralised area occupancy and rents are expected to continue to be impacted in 2023 as large supply delayed from 2022 reaches completion. The prime area is likely to lead a leasing recovery in 2023 as pandemic effects fade, supported by emerging NEV, skincare and domestic fashion brands, as well as outdoor and sports tenants.