Shanghai retail leasing demand remains stable

• Retail leasing was steady over 4Q as consumption continued to recover and more landlords offered rental concessions. Net absorption in Shanghai’s urban area reached 268,000 sqm, slightly moderating from 320,000 sqm the previous quarter, and leaving 2023 as a whole with a take-up of 730,700 sqm.
• We observed active leasing demand from a range of sectors over 2023, including sports apparel and equipment, perfume brands, boutique fitness clubs, children’s entertainment venues, and beverage and bakery shops. Towards the end of the year, we observed slower leasing from new energy vehicle (NEV) brands and high-end restaurants. 

Six new projects enter the Decentralised market

• Six projects added a combined retail GFA of 362,500 sqm to the Decentralised area. Performance among the new completions diverged, with Bailian Xijiao and Zhenru MAX City performing well, with occupancy rates over 95%. For the full year 2023, two Prime malls and ten Decentralised malls delivered a total retail GFA of 649,500 sqm.
• Prime market vacancy decreased slightly by 0.3 ppts q-o-q to 11.4% as a result of limited new supply. Meanwhile, the Decentralised market’s greater supply spurred more intense competition for landlords. Decentralised vacancy increased 0.6 ppts q-o-q to 12.2%. 

Rents continue to drop in the Decentralised area

• Average rents in the Prime area remained flat at RMB 46.6 per sqm, per day, in 4Q23. In the Decentralised market, rents declined 1.0% q-o-q to RMB 16.8 per sqm, per day, as landlords sought to attract tenants.
• For the full year 2023, average Prime rents declined 0.2% y-o-y, while Decentralised rents were down 4.2%. Although rents fell for the year in both markets, the pace of decline decelerated from that of 2022. 

Outlook: Large supply to add pressure to the Decentralised area

• We expect new supply in the Prime area to remain limited in 2024. Leasing demand in the Prime market is expected to remain stable, especially from sellers of sports and apparel equipment, cosmetics and perfume brands, and F&B tenants. We expect more international boutique sports and cosmetics brands to debut in Shanghai in 2024. 
• The Decentralised area is expected to continue facing challenges in terms of rents and occupancy over 2024, as a result of large supply pressure. We expect performance between different projects to diverge further.