Early this year, Link REITs’ high-profile acquisition of Metropolitan Plaza in Guangzhou’s Liwan district placed Guangzhou’s retail sector in the investor spotlight. Real estate transaction activity has increased significantly since then.
Our data shows that besides Metropolitan Plaza, two other malls and one large retail podium within a mix-use property have been transacted as of year-to-date. Market information also indicates there are other deals pending closure.
The increased transaction activity provides strong indicators that investors are taking a keen interest in Guangzhou’s market. Guangzhou’s market can offer diversified investment options with varying prospects of rental growth that suit different investors’ investment strategies.
We believe more shopping malls in Guangzhou will be transacted once more assets are available, for the following reasons:
- Opportunities for value-add investment arise quite frequently. Many shopping malls in Guangzhou are owned by local developers who lack the experience of running them. Some developers are willing to sell their assets – either because they intend to at the very early stages of the development – or because of financing purposes.
Potential purchasers, usually institutional investors or experienced operators, can take advantage of these acquisitions and raise the properties’ rental incomes through better operation and a tenant-mix optimisation.
Such opportunities are most likely to be found in traditional precincts where aged malls are in need of upgrade or in populous suburban precincts where many new malls are under development.
- The retail investment market in Guangzhou is gradually maturing. Since we are seeing more institutional players on the investment market, the market liquidity is bound to increase, and opportunities for transactions in core or core-plus assets will rise accordingly.The Metropolitan Plaza acquisition is an excellent example of transaction between two institutional investors. Such investments could provide, on top of the stable returns, some room for further income growth through rental reversion if there is a significant proportion of leases that will expire in the short term.
Experienced operators/investors should be able to achieve an 8-12 per cent average rental reversion growth in top performing regional malls such as Metropolitan Plaza, and this rate is typically higher than the average contractual annual rental increments. Besides the rental reversion growth, lease expiration also allows the new landlords to fine-tune their tenant-mix in order for their properties to better generate rental income.
- The rental outlook for mature regional malls is reasonably optimistic. As Guangzhou’s retail market evolves from a centralised market towards decentralisation, mature regional malls with good connectivity and a large customer base will benefit most. Both sales and rental incomes are expected to increase gradually, and these malls are expected to become investor favourites.
To sum up, this year’s transaction flurry in Guangzhou’s retail sector is not at all incidental, but a signal of a more active and more mature investment market in the near future.
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