Observations from the ground: occupier demand for retail centre space in Zhengzhou

February 1, 2013 / By  

I recently visited Zhengzhou, a heavily industrialised city and the provincial capital of Henan in Central China. The city is the second largest in Central China (after Wuhan) and serves as one of the strategic transportation hubs in the region and the focal point of development in one of the most populous provinces in China with close to 100 million people.

Venturing beyond the glamour of the new business district and economic zones, however, we see near and medium-term risks of limited occupier demand for retail space in the city. As shown in the income distribution chart below (we recognise that there are inherent flaws with income data in China. However, available data do allow for some comparative analysis of underlying socio-economic structure between cities. For this analysis, we’ve excluded the low-income segment (< 30K), which accounts for roughly 80% of the urban population in Zhengzhou), while Zhengzhou is a provincial capital with an urban population of over 8 million residents (resident population is 8.9 million in 2011 (EIU), approximately 4 million resides in the city proper), it is considerably skewed towards the low income segment and relative to its more affluent provincial capital neighbours, with the absolute number of consumers quickly dropping off above the middle income bracket.

We readily observe the differences between the cities in the field. Across the board, brand diversity in Zhengzhou pales compared to some more vibrant inland cities including Wuhan and Chongqing, which themselves are a step below the wealthier Tier 2 capitals such as Nanjing and Chengdu. That is not to say that there is no demand for fast fashion brands or mid-market retailers in the city, just that other more affluent Tier 2 markets are potentially more attractive to retail brands for scalable expansion.

Therefore, while the aggregate consumer spending looks impressive at the city-level, prime retail developers and operators in the city are having a more difficult time attracting quality international mid- and mass-market fashion brands to Zhengzhou.

Arguably, as the city moves up the economic development curve, the absolute number of higher income consumers will increase, thus providing Zhengzhou with a larger pool of middle class consumers. However, income forecasts through 2020 suggest that even as Zhengzhou moves up the income ladder, the number of middle class consumers in other cities will grow even faster. Therefore relative to other wealthier cities, Zhengzhou won’t become more attractive, and we would expect brands to prioritise more affluent tier 2 cities for expansion above Zhengzhou in the near term.

My outlook for 2013-4: expect to see higher vacancy rates city-wide and a higher likelihood of delays in new mall openings due to low pre-commitment rates.

Retail snapshot: As of 2012YE, Zhengzhou has 1.2 million square metre of prime shopping mall stock, of which nearly 15% is vacant. The city is expected to add another million square metres of shopping mall space in the next two to three years.

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