The consumption market in Shenzhen managed to achieve a moderate recovery in the post-COVID-19 period. As per the Shenzhen Bureau of Statistics, in the first eight months, total retail sales in Shenzhen declined 10.3% y-o-y, narrowing by 12.6 ppts from the first quarter when the market took the hardest hit. The performance was compelling, even compared to that of other Tier-1 cities in China.

Figure 1: Cumulative y-o-y growth of total retail sales of consumer goods – Tier-1 cities in China

Note: *Number refers to the improvement in cumulative y-o-y growth of total retail sales in Shenzhen from
Jan-Mar to Jan-Aug, while that of Beijing, Shanghai, and Guangzhou was+7.4 ppts, +14.0 ppts
and +7.5 ppts, respectively
Source: Statistics Bureau of Various Cities

China’s economic rebound, on the back of effective control of the pandemic, was undoubtedly the most important driver for such improvement. Rebounding from the 6.6% y-o-y decline in 1Q20, Shenzhen recorded positive GDP growth of 2.6% y-o-y in 1-3Q2020, which topped among four Tier-1 cities. Meanwhile, disposable income per capita in Shenzhen almost reached last year’s level. Driven by an enhanced economy, along with reduced uncertainties on the future outlook, residents were more willing to spend. That laid a solid foundation for consumption recovery.

Shenzhen’s demographic profile also contributed to the relatively quick pace of recovery. As China’s one of the most energetic cities, Shenzhen enjoys large consumer groups of younger generation and upper-middle class. These groups typically have strong purchasing power and display a greater appetite for high-quality consumer goods, such as luxury goods, smart devices and trendy brands. Their pent-up demand was soon released when normalcy returned.

Furthermore, the city government introduced multiple measures to bolster consumption. For example, more than RMB 500 million worth of digital coupons have been distributed to the public since late-March. Plus, up to RMB 40,000 of subsidies will be offered to consumers who purchase new energy vehicles.

The ongoing recovery of consumption naturally benefited the retail property market in Shenzhen. Unlike other cities that faced high vacancy pressure, the retail market in Shenzhen was able to regain vitality in a relatively quick manner, especially high-profile shopping malls that cater to changing consumer behaviours.

Figure 2: Overall vacancy rate from 1Q19 to 3Q20 – Tier-1 cities in China

Note: *Numbers refer to the overall vacancy rate by end-3Q20
Source: JLL Research

What’s more, due to travel restrictions, Chinese luxury spending was kept largely onshore. Consequently, international luxury brands experienced robust sales growth in Shenzhen, driven mainly by the demand from upper-middle class and affluent families. Some brands decided to expand their presence in Shenzhen. For example, Balenciaga and Dior expanded their retail network by setting up their second stores in MixC Shenzhen Bay in 3Q20.

In the meantime, to better address the need of the younger generation who treasures distinct and diversified shopping experience, more newly launched first stores or flagship stores from quality retailers were recorded in well-performing shopping malls. For example, new stores of Mercedes Me and Gentle Monster in MixC World gained popularity among the young customers.

Driven by growing purchasing power and the subsequent consumption upgrade, the Shenzhen retail market is expected to improve continuously. With improved sales performance and restored confidence, more retailers are likely to resume their expansion plans, ensuring a gradual recovery of overall leasing demand. As such, rental growth may turn positive in the short term, even though a large influx of future supply will exert pressure on overall vacancy in the next 12 months. We hold a positive view that high-profile shopping malls, which will soon complete upgrading their tenant-mix, may continue to see an upward trend in rents.

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