China: To Save or to Spend?
I was recently in Guangzhou, China for the Samsung Securities 2010 Retail Property Conference. I came away, as many of the participants in the event, awed by this Tier 1 city’s transformation in preparation for the 2010 Asian Games. Construction was pervasive with both commercial and residential projects sprouting in every part of the city. Massive infrastructure spending was evident in the smooth highway from the airport all the way to downtown. There is no doubt that China’s rise has become palpable.
During the conference, I presented our views on China’s fast-growing retail sector. Notably, China currently boasts one of the most buoyant retail markets in the Asia-Pacific region. Vacancies in shopping centers and department stores remained in single-digits particularly in Tier 1 cities including Beijing and Shanghai through the third quarter this year, while rents have been eking out consistent gains even through the past downturn. At the same time, a number of developers have been ramping up their retail development pipeline at this opportune time. However, such an enormous amount of retail projects under way has also led to mounting concerns about the country’s ability to generate a commensurate long-term improvement in retail demand.
In our view, there are several reasons for guarded optimism. First, favorable demographics and macroeconomic conditions will sustain China’s retail sector. Population remains the largest in the world and is further set to grow over the next few years – and thus, portends a significant potential market. In addition, strong economic fundamentals have fuelled rising incomes across the country. Such backdrop has kept consumer spending on an uptrend. Official government statistics report retail sales growth of over 10% annually for all but one of the past 10 years. Furthermore, the consensus outlook calls for a continuation of robust retail sales for at least the next five years, barring any economic shock. Lastly, some Tier 2 and 3 cities still remain relatively underserved as most of the new supply has been concentrated in Tier 1 cities. In the chart, a number of Tier 2 cities are already reporting double-digit income increases from 2009 – and retailers, who rely on income growth to drive retail sales higher, should look at these cities for potential opportunities.
It will also be critical for any retail developer to be vigilant of evolving consumer preferences. Though per capita income in China is still relatively low compared to advanced economies, this country has shown a strong appetite for high-end goods. In 2009, China has surpassed the U.S. to become the second-largest luxury market, with Japan as the world’s top luxury brands market.
Sigrid Zialcita,
Asia Pacific Research, Singapore