Overall Outlook

1. China retail market led the economic recovery in 1H23. After taking a toll from COVID lockdown disruptions in 2022, China’s retail market experienced a decent recovery in 1H23 thanks to lifting of COVID restrictions. Total retail sales of consumer goods grew by 8.2% y-o-y to Rmb22.7trn in 1H23, with contribution of final consumption expenditure to economic growth reaching a record high of 77.2%. As per data from JLL, average vacancy rate of quality retail malls in 21 key cities fell 0.3ppts q-o-q to 10.9% in 2Q23, reversing the uptrend over the past seven quarters. As developers are adopting a “price-for-volume” strategy by offering more favourable rent discounts to fill up current empty spaces and lower vacancy rates, there was mild pressure on rents during the quarter with average rental on the ground floor of shopping malls in 21 key cities falling 0.1% q-o-q during 2Q23. With the stabilising macroeconomic outlook and consumption-related policy stimulus gradually taking effect, we expect leasing demand to progressively return along with a recovery in consumer sentiment. Our in-house consumer team currently expects 7% y-o-y growth for China retail sales in 2023.
   
   
2. Temporary supply peak in 2023 due to openings of deferred projects from 2022. Project construction was disrupted from escalated lockdown measures in 4Q22 and this had led to a concentrated release of new retail supply in 1H23. Quality retail mall supply in 21 key cities jumped 63% y-o-y to 3.4m sm in 1H23 (equivalent to c.2.5% of total inventory), marking a 5-year peak. There remains 20m sm of new supply (c.15% of total inventory of the 21 cities we track) that is expected to come onstream in 2H23. Together with an expected gradual pickup in leasing demand, we expect average vacancy rate to improve to less than 10% by the end of 2023 with rents largely steady at the current level. Higher tier cities are expected to fare better as retailers prefer to expand store counts in these cities (71% of retailers plan to expand in China, as per CBRE’s 2023 Asia Pacific Retailer Survey). Across cities, Shenzhen, Guangzhou, Xiamen are better poised to outperform given 1) healthier vacancy levels; 2) less new retail supply pressure in near-term; and 3) below-average retail space per capita.
   
   
3. Retail property market is approaching inflection point. Total investment volume in China grew by 3% y-o-y in 1H23 upon lifting of COVID-restrictions and resumption of normal business activities. Of which, retail real estate asset transactions jumped nine-fold to c.Rmb9bn and represented a greater portion of 8% (vs 3% in 2022) of total investment transactions. As per data from CBRE, the average capital value of quality retail properties in Tier 1 cities has declined c.20% since 2019 due to the combined impact of rental pressure and moderate cap rate expansion during the period. Looking ahead, the return of leasing demand and more favourable onshore liquidity environment (60bps 5-year LPR cut since 2019) should support asset prices. Meanwhile, the expansion of CREIT into consumer infrastructure should help monetize existing retail properties and thus stimulate investment appetite. We believe the first batch of commercial CREIT listing may potentially land in 4Q23 at the earliest. All these should reinvigorate activities in the retail space.

Jason LAM
[email protected]
+852 3668 4179

Dexter CHUN
[email protected]
+852 3668 4461