The mood has started to lift for China’s luxury market. Bain & Company reports that China’s personal luxury goods market grew by four per cent in 2016, “the first sign of a revitalisation in three years.” Sales in Hugo Boss rose by double digits in 2016 and early 2017, while firms such as Burberry and Kering Group – which operates the Gucci, Bottega Veneta and Saint Laurent brands – highlighted rebounds in China in 2016.

Several trends that sapped sales from the mainland market from 2013-2015 have moderated or gone into reverse. For example, the initial impact of the national government’s anti-corruption campaign has passed, giving way to healthier luxury spending driven by a growing and aspirational middle class.

A major contributor to the recovery of the luxury market is the “reshoring” of purchases that consumers previously might have made overseas. Chinese shoppers previously flocked to Hong Kong and beyond to avoid inflated prices in mainland luxury shops, but mainland sales recently benefitted from China’s falling currency, with luxury brands offering discounts to even out the price differences from overseas purchases.  The government crackdown on the extensive “daigou” market of overseas travelers buying luxury goods to resell in China has also helped drive luxury sales back home.

Chart: The ‘reshoring’ of Chinese consumer spending
Source: UBS (Estimates by European Luxury Team)

China’s high-end retail properties benefiting from growth in luxury sector

Leading luxury destinations such as Beijing SKP and Shanghai’s ifc mall all saw retail sales improving from 2015 to 2016. Rising sales are likely to boost rental incomes for landlords, particularly for those operating on percentage turnover rather than fixed rent models.

The luxury property market still faces challenges, however, notably because rising luxury sales have yet to translate into a rebound in leasing. Luxury brands are exercising caution following several difficult years, and some firms even continued cutting down on their number of stores in 2016. We expect that most brands will wait until 2018 at the earliest before they revise store rollout plans.

Even then, new leasing demand is likely to be concentrated in coastal and Tier 1 cities, whose strong service sectors and large, educated middle classes have made them the main beneficiaries of the luxury spending rebound. Inland and lower-tier markets are more dependent on the fading effects of high natural resource prices and massive stimulus spending. We anticipate that luxury brands will continue optimising store networks in these areas to be in line with more stable sources of demand.

Even if its effects prove to be uneven, the luxury rebound can be credited for shifting the narrative from how landlords must compete for a shrinking pie, to how they can best position themselves to take advantage of luxury demand that is growing sustainably from a healthy middle class base. For a sector often depicted as thrown off balance by e-commerce and beset by oversupply, the resurgence of high-end spending offers some welcome good news.

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