Retail landlords have had a torrid time in recent years, as they try to cope with the impact of e-commerce on tenants and their assets. The growth of online retail is a global phenomenon, yet landlords in Asia seem to be suffering less than those elsewhere.
The UK and US appear to be suffering most; in the US, shopping centers are losing department store anchor tenants at an alarming rate, while the UK high street has been hit by a wave of retailer failures.
Chris Heady, chairman of Asia-Pacific and head of real estate Asia at Blackstone, says: “Retail all over the world has been facing some headwinds due to the emergence of e-commerce; online retailing is akin to adding more physical supply to the market.”
However, retail in Asia appears more resilient. CBRE reports shopping center vacancy in China fell to 6.5 percent from 9.5 percent between 2013 and 2018, while JLL’s Asia-Pacific shopping center rental index shows steady growth since the GFC.
Overall, however, investors have tended to lump in retail in Asia with other regions: retail investment in the region dropped from $29.5 billion in 2017 to $19.7 billion last year, according to CBRE data. CBRE’s 2019 investment intentions report for Asia-Pacific, Europe and North America show retail is behind office, residential and logistics when it comes to investor preferences.
Some global private equity groups have been bucking the trend and investing heavily in Asian retail assets. Blackstone owns stakes in nine shopping centers in India through its Nexus Malls platform. The group also acquired 50 percent of US retail property specialist Taubman’s stake in a portfolio of three newly built and fully occupied shopping centers in Asia – two in China and one in South Korea – for $480 million. Blackstone has also bought an office complex and VivoCity shopping mall in Shanghai, reportedly for $1.2 billion and was part of an investor consortium to acquire a 12-shopping center portfolio from Hong Kong’s Link REIT for HK$12 billion ($1.5 billion; €1.4 billion).
Warburg Pincus has invested heavily in Asian developing market retail. In May, India’s Runwal Group announced it had formed a $1 billion joint venture with Warburg Pincus to develop shopping centers across the nation and earlier this year, Warburg Pincus-backed platform NWP Retail raised $200 million to boost its Indonesian development program. Warburg Pincus has also been investing in Vietnamese retail assets since 2013.
Asia-based private equity groups, including ARA Investment Management, Arch Capital and SC Capital have also acquired retail properties in the past 12 months.
“There are a couple of factors which have benefited retail in emerging Asian markets,” says Heady. “The first is that the retail industry is earlier in its evolution so there is less retail real estate per head than in more developed markets, which leads to less competition.”
Data from Cowen and Company, ICSC and Cushman & Wakefield show the US has 23.5 square feet of retail space per person, while the UK has 4.6 square feet and Japan 4.4 square feet. However, China has only 2.8 square feet per person, Thailand 2.3 and Indonesia only one. This relative undersupply means there is far more potential for growth in less mature Asian markets.
“Secondly,” says Heady, “many Asian countries have a growing middle class, which has been the beneficiary of rising wages and increasing availability of finance, and this has translated into growing retail sales.”
In April this year, China’s retail sales growth fell to its lowest level in 16 years. However, that level was 7.2 percent annualized, while the best the US has managed in the past decade was 5 percent in 2011. It managed 3.1 percent annualized this April. Asia’s developing economies are seeing even more dramatic growth: the most recent figures for Indonesia show 10.1 percent annualized retail sales growth in March and for Vietnam 11.1 percent in the year to May.
Liz Hung, associate director, Asia-Pacific research at CBRE, argues that Asian retail landlords have been quicker to adapt to the new retail environment. “Landlords in Asia have been very quick to catch up on trends. For example, the change toward including more F&B space has moved very quickly in this region. Landlords have also been willing to include more entertainment and leisure facilities, aside from the usual cinemas.”
“In the most successful malls, there is a strong connection between the center and the community”
The key trend, of course, is e-commerce. Chris Wu, group chief financial officer at Chongbang Group, a Chinese developer of retail-led mixed use schemes, which is backed by APG Asset Management and Ivanhoé Cambridge, argues that China and its property sector have not just adapted, but embraced the new world of retailing.
“China is way ahead of the rest of the world in omni-channel retailing,” he says. “There are many examples of this, such as fresh produce vending machines and unmanned stores which use facial recognition. In addition, China is also very ahead in terms of online shopping – 18.4 percent of total retail sales are made online in China – and mobile payments, which underpins the environment and ecology that is necessary for omni-channel retail.”
Initially Chongbang focused on helping online retailers to go offline, says Wu. Alibaba’s first online/offline He Ma Fresh Mart was opened at Chongbang’s Life Hub@Jinqiao in Pudong, Shanghai. “However, in the last few years our focus has been helping a range of offline retailers, including food and beverage, entertainment and service outlet operators, to go online.”
Far from being a threat, e-commerce is a boon to Chongbang. “The integration of online and offline operations, and ultimately omni-channel retailing has expanded the market base for us, helping to solve one of the biggest problems of the retail industry in China – the shortage of retailers and brands, especially home-grown brands. Life Hubs now host brands that have not previously had a presence in malls,” says Wu.
Another key advantage for Asia’s most successful shopping centers is they are more embedded in the community. Most modern malls are built above public transport nodes and are part of a mixed-use development including residential, office and hotels. This means the malls are constantly in use and the development creates its own footfall.
“Successful mixed-use projects are very synergistic as people want to live, work and play there because of the amenities, usually retail-led,” says Wu. “In our experience, when you add in other elements, such as hotels, offices and residential, each of the elements performs much better than the average.”
Hung adds that Asian malls are more likely to be at the center of their communities, “the shopping center as a social center, as a place where people want to spend their leisure time, is an important concept here,” she says. “In the most successful malls, there is a strong connection between the center and the community.”
While retail has a better story in many Asian markets, the region is far more heterogeneous than North America or Europe. For example, Hong Kong retail shop rents halved between 2013 and 2017, and have been flat since then. Many cities and submarkets in China and India are lumbered with excess supply of mall space.
There are also differences between Asia and the more developed neighboring markets of Australia and New Zealand. Australia is unusual in that it has 11.2 square feet of retail space per capita, more than two-and-a-half times the space per person of Japan, the most developed market in Asia.
Heady cautions: “There are still wide variations between markets in the region; investors need to be very selective about acquisitions.”