According to Jones Lang LaSalle’s latest research mainland China’s real estate sector witnessed a record level of investment activities in 2011. The research, entitled “China Retail Investment Outlook 2012: Gearing Up for Domestic Demand,” stated that investors have been buying up more real estate with total investment volume reaching approximately RMB 26.5 billion (US$ 4.2 billion).
The report also stated that retail accounted for a record high of 30 per cent of total commercial transaction volume in China last year and that investment outside traditional Tier I cities reached an unprecedented high, receiving over half of total transaction.
“China’s retail sector is poised for a major upgrade,” says Mark Ho, Head of China Investment Research at Jones Lang LaSalle.
“The government has already set in motion a comprehensive range of pro-consumption policies, both direct and indirect, to orchestrate a consumption boom. The impact from these measures is expected to filter through over the next few years and will effectively give China’s retail sector a structural boost,” adds Ho.
David Hand, Head of China Investment at Jones Lang LaSalle, noted “Investor activities in 2011 clearly reflect the upgrade in prospects for China’s retail sector. The increased allocation to the sector and proliferation beyond Tier I cities suggest that some investors have already aligned their investment strategies to capitalize on the nascent economic transformation process. More investors are now targeting opportunities in relatively less mature cities where the impact of urbanization and income growth is expected to feature prominently. As other investors come to recognize the permanent changes unfolding in China’s retail sector, more are expected to follow with a heavier weighting toward the sector.”
Domestic and Asian investors led the charge in investing beyond Tier I cities. As retail markets in lower-tier cities remain in a relatively early stage, many potential opportunities lie in development projects. Domestic and Asian capital, with more market familiarity and a higher risk-appetite, are leveraging on their competitive advantages of better deal access and local market knowledge to expand aggressively.
On the sell side, domestic sellers dominated as the bulk of retail properties remain in the hands of these domestic groups, especially in lower-tier cities. However, with more foreign investors going into retail assets, the sellers’ market will broaden in a few years as these assets reach maturity.
Jones Lang LaSalle expects the evolution of China’s retail sector to accelerate over the next few years as China’s economic transformation gathers momentum. The increase in investment across China would lead to further broadening and deepening of the retail real estate sector. The retail landscape is also rapidly changing as new and modern shopping centers emerge in cities across China. For example, department stores were the dominant format in Tier II cities as recent as five years ago, but shopping centers have now overtaken them in terms of market share.
“We are still in the early days of the economic transformation process and expect to see more investment opportunities emerge as China’s retail sector develops at a faster pace,” said Hand. “While demand-side fundamentals strengthen, new supply will intensify the competition among shopping center owners, which means that for investors, it will be even more important to have comprehensive asset management strategies that interweave leasing marketing, promotions and property management plans formulated right from the start and have the sector expertise to ensure effective execution. Additionally, to fully capitalize on China’s retail growth, investors will need to extend their research and investment to a wider geographical coverage.”