Shanghai Retail Real Estate Market Report 2011 4Q

Summary:

ECONOMY 

With the major Western economies’ future prospects still unclear, China stands out as the obvious choice for international retailers to expand their global footprint. Shanghai is characterized by a strong local economy, solid infrastructure support, a mature retail market and a large consumer base. Therefore, the city represents a prime market-entry target for many international brands hoping to establish a presence in China. According to the Shanghai City Commercial Information Center’s statistics, during the first three days of the National Holiday 2011, Shanghai’s 60 key shopping malls’ total sales volume reached RMB1.035 billion, up 26.2% year-on-year. 

FOURTH QUARTER RENTAL REMAINS STABLE WITH VACANCY RATE SLIGHTLY UP 

Due to the strong demand and limited supply, the five key submarkets in Shanghai saw slight rental increase in the prime retail (ground floor) space, up 0.38% quarter-on-quarter, to RMB1,835 per square meter per month (/sq.m./mo). Henderson Metropolitan – a new commercial project that entered the market in the fourth quarter, has already achieved an 80% occupancy rate. This market entrant led to a slightly elevated overall market vacancy rate of 4.5%. 

LIMITED PRIME RETAIL SUPPLY, WITH UPGRADE OF TENANT MIX 

Within Shanghai’s five key retail submarkets, during 2011, new supply was limited to just one major project- Henderson Metropolitan on East Nanjing Road. This highly visible project contributed a much-needed 35,450 sq.m. to a growingly supply constrained market. Many landlords, hoping to maintain competitive positions, have started removing older uncompetitive tenants and offering prime retail space at comparatively low rental prices to select recognizable and well-branded tenants. Through this process, the landlord is able to gentrify brand mix, re-establish market position while offsetting rental reduction losses in prime retail spaces with rental increases in other spaces throughout the newly upgraded center. 

In 2011, East Nanjing Road underwent the most distinctive transformation. Case-in-point, brands such as Zhang Wang Fu Jewelry, Expo Souvenir and Victoria Crown were replaced at Bund Plaza by a flagship store for the trendy and popular Fast Fashion brand, Forever 21. This year, the West Nanjing Road submarket saw vacant projects such as Civic Tower, New Century Plaza and Tonli Plaza remodelled, renovated, and leased to major brands such as Gap, American Eagle, H&M, Uniqlo and Asobio. This once-dilapidated section of West Nanjing Road has now been transformed into a vibrant Fast Fashion focal point. Xujiahui submarket landmark Grand Gateway plaza has committed to a business strategy of upgrading 40% of tenants every year. This year, Agnes B and DKNY jeans were moved to the second floor in order to make way for luxury brands Vivienne Westwood and Loewe. Middle Huaihai Road, which underwent significant upgrading previous to the World Expo, has continued to see an improvement in tenant quality. For instance, space held by sporting brand Adidas was vacated and re-leased to luxury leather dealer LANCEL while New World Tower’s K11 shopping center is steadily progressing. 

OUTLOOK—FUTURE FOCUS: HONGQIAO SUBMARKET 

Major projects such as L’Avenue, Jin Hongqiao and Gubei Center Phase II, will contribute approximately 200,000 sq.m. of high quality new supply to the burgeoning Hongqiao market. L’Avenue, which is designed to integrate various international luxury brands under the LVMH group, is poised to become Hongqiao’s central landmark. Jin Hongqiao is the submarket’s northern landmark project which is oriented towards family, international and leisure activities. Gubei Center Phase II is set to receive a boost when it becomes home to the 180 year-old, venerable department store brand Takashimaya in 2012. According to Changning government’s development plan, the Hongqiao submarket is expected to see the commercial retail area surge pass 700,000 sq.m. in the next five years.