Ample shopping-related real estate and a glut of new development in China is leading to an overheated property market, panelists at PERE’s first ever Forum in Beijing said yesterday.
Partly in reaction to government policy restricting residential development and partly because of China’s growing consumer demand, Chinese developers have in recent years flocked to developing retail schemes. According to research by property services firm Jones Lang LaSalle which was recited on the stage, there is more than 24 million square metres of shopping malls alone in China and with another 18 million square meters currently slated for development, private equity real estate firms expressed their concern about a saturated market.
Beng Tiong Ng, chief executive officer at ARA Asset Management, warned how there would be “blood on the streets and lessons learned,” as a result of this latest rush into a real estate asset class in China. He said: “For various reasons more and more money has been poured into the retail space.” He said many developers would suffer as a result of poor occupation rates but that, the Chinese consumer story was such that, in the long term, the retail market would return to strength.
Among the reasons for the oversupply was an attitude adopted by many Chinese developers of treating retail real estate as a necessary planning evil when developing residential schemes, particularly in second and third tier cities. Many of China’s local authorities had insisted residential blocks are developed with supporting retail regardless of whether they warranted it. “In most cities, [the local authorities] wanted mixed-use developments – a retail podium and a tower of residential,” he said, “but the end result of that is we are left with a lot of retail properties that are small, scattered and fragmented.”
Humbert Pang, managing principal at Gaw Capital Partners described how his firm had participated in such mixed use-schemes. He said that while the residential component of the schemes enabled the firm to recycle its capital without much issue selling the retail alone would prove challenging. He said: “Our target IRR is 20 percent. We have a couple of shopping malls in tier I cities where we could achieve our target return. For second and third tier cities we If we were to single out just the retail element – it would be very difficult to achieve that.”
Nonetheless, certain firms regarded the developers’ issue as a potential opportunity for private equity capital. David Dingmin Chang, managing partner of Long Hills Capital, said his firm could pick opportunistically from the surplus retail components in such schemes that nonetheless benefited from decent retail fundamentals. He said: “There is good supply and there is bad supply. A shopping mall that is 90 percent occupied is not oversupplied. But a shopping mall that can only be 50 percent occupied is oversupplied.”