Retail oversupply in Chinese cities?

December 7, 2012 / By  

As China’s developers join the retail bandwagon and complete shopping malls in greater numbers, we hear more voices of concern about shopping mall oversupply in China. A key question is ‘are some cities at greater risk of oversupply than others?’

Per urban person, Shenyang, Xi’an, and Wuhan have the highest shopping mall space provision. However, this simple analysis does not take into account income. We think looking at the retail stock and supply relative to the size of the addressable consumer base in a given city is probably more meaningful. We can roughly estimate addressable consumers by looking at the number of people earning more than a minimum level of income, in the case of China, RMB 30,000 per person per annum. While this may sound low, on a PPP basis (purchasing power parity) it is reasonable and should serve to exclude the urban poor, allowing us to focus on “potential” mall consumers. Among Tier II cities, the largest absolute number of potential consumers can be found in Nanjing, Hangzhou, and Tianjin.

By dividing shopping mall stock by the consumer base, you get shopping mall stock per consumer. Shenyang stands out as a clear outlier, exceeding any of the other 20 markets we track in China. Next in line would be Wuhan, Chongqing, and Zhengzhou. But, these are all provincial capitals serving as regional hubs which are the centre of economic activity for a broad surrounding area, and the key retail centre for the area. We can get a sense of that by seeing the high percentage of the province’s GDP generated in these hubs, as well as the even higher share of their province’s retail sales.

Shenyang is a classic example – surrounded by small and mid-sized manufacturing and mining towns and satellite cities, many of which do not have the scale to support their own significant shopping malls, they provide Shenyang with essentially a 100 km+ trade area, within which live nearly 25 million people. Therefore, we cannot immediately conclude which of these hub cities are truly over-supplied. The same analysis can be done using a higher income cutoff of, say, 60,000 RMB per person per annum. Shenyang is still an outlier, but Chongqing and Zhengzhou are close seconds, with most other cities not standing out.

Another possible indicator of oversupply to look at is the vacancy rate. Shopping mall vacancy is highest in Shenyang, Zhengzhou, and Chengdu, but this has more to do with the large percentage of the city’s stock that has been completed recently where the malls have not had much time yet to become seasoned. Over time, as the malls stabilise, we would expect the vacancy rate to trend downward.

City-level supply and demand balance is only part of the story. While it is certainly important, we would rank it only as the second or perhaps third most important factor to a mall’s success. More important are the micro factors such as the project’s management, mall design, positioning relative to its immediate catchment area, tenant mix, promotional activities, etc. What is happening in the surrounding 3-5 km radius? Who are the residents in your trade area and what do they want in a shopping destination? We believe that every city can support a handful of very well managed shopping malls regardless of the total level of supply in the city. The standards for retail asset management are still relatively low in China and an asset manager well equipped to put the right tenants in the right place has a much higher likelihood of success.

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