Savills World Research

Briefing Retail sector January 2014

Image: Nanjing Road (E), Huangpu district SUMMARY Aside from allocating more space to F&B and lifestyle tenants, some landlords are also introducing smaller stores to increase variety and encourage consumer dynamism.

 One new was ­ F&B and lifestyle retailers made launched in Q4/2013, adding 30,000 up the majority of large-space leasing “It is taking longer and sq m of retail supply to the market. transactions, as mainstream fashion retailers remain cautious. longer to negotiate new ­ First-floor shopping mall rents store locations, especially in in primary areas increased by  New supply is expected to 0.5% quarter-on-quarter (QoQ) to exceed 1 million sq m per annum recently completed projects, an average of RMB47.0 per sq m over the next three years. per day, while rents in non-primary with mainstream international (secondary and emerging) areas ­ A two-tier market is starting to increased by 0.1% QoQ to an retailers remaining cautious emerge, with well managed malls in average of RMB18.5 per sq m per prime locations continuing to attract on opening new stores.” day. tenants and shoppers, while many James Macdonald, Savills Research ­ Shopping mall vacancy rates in malls in emerging locations, apart primary locations increased by 1.0 from the best, are finding it difficult to percentage point (ppt) in Q4/2013 to attract suitable retailers and shopper 4.1%. footfall. savills.com.cn/research 01 Briefing |Shanghai retail sector January 2014

Market commentary well as competition for shoppers with The city’s total shopping mall stock The retail market in Shanghai in 2013 online platforms or overseas shopping. increased 13.0% year-on-year (YoY) has not been easy for many landlords. A total of eight projects were launched to 6.2 million sq m by the end of 2013. The market is facing more challenges in 2013 with a total retail GFA of With the launch of Jing An Kerry than ever before, from slowing 717,600 sq m, 3.8% higher than Center and iapm, shopping mall stock economic growth, to rising supply in 2012. One mall, , in prime retail areas increased by levels and competition for tenants, as accounted for 44.6% of this space. 15.8% YoY to 1.5 million sq m.

GRAPH 1 Average rents in primary, secondary Retail rental indices, Q1/2002–Q4/2013 and emerging area increased by 0.5%, 0.2% and 0.1% QoQ respectively, Primary Secondary Emerging while annual growth was 2.2%, 0.7% and 0.5%, the lowest levels recorded 200 since 2010.

180 Only one new shopping mall was launched in Q4/2013, the 30,000-sq m Z Star Mall, which held its soft 160 opening in December. The project

is the retail podium of the mixed- 140 use development Z Star City, with the retail podium mainly servicing the surrounding office workers and 120 residents. Located to the north of Q1/2002=100 Shanghai South Railway Station, the 100 project is opposite the 107,486-sq m commercial site purchased by the Vanke and Greenland consortium for 80 RMB5.4 billion in 2012.

Primary retail area vacancy rates 60 increased by 1.0 ppt QoQ to 4.1%. Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 02 03 04 05 06 07 08 09 10 11 12 13 Four of five primary areas recorded an increase in vacancy rates, with Source: Savills Research only Xujiahui witnessing a fall in rates of 1.0 ppt after the successful re- GRAPH 2 subdivision of portions of both Metro Vacancy rates by area, Q3/2013 vs Q4/2013 City and Grand Gateway. Since 2009, Q3/13 Q4/13 Xujiahui has been the only primary 12% retail area that has been able to keep its vacancy rate below 1.5%. The area has diverse tenant positioning and 10% target consumer groups, with projects feeding off and supporting each other rather than going head to head with 8% fierce competition for every retailer and shopper.

6% After the successful adjustment of its basement floor, which introduced a dynamic mix of Japanese and 4% overseas tenants in 2010, Metro City has now turned its attention to its fourth floor, switching from an 2% electronics market to a richer mix of fashion, accessories, F&B and underwear retailers. The fourth floor has also introduced some new brands 0% NJE NJW XJH HHM LJZ ZSP WJC SCN HQ to Shanghai, such as New Look, Think Kitchen and Lizarran. Internal Primary areas Secondary areas restructuring is continuing on the Source: Savills Research fifth and sixth floors, with a theatre Note: From left to right, Nanjing Road (E), Nanjing Road (W), Xujiahui, Huaihai Road (M), Lujiazui, Zhongshan Park, Wujiaochang, Sichuan Road (N) and Hongqiao. scheduled to open in 2014.

02 Briefing |Shanghai retail sector January 2014

Metro City is one of the most popular TABLE 1 projects with Shanghai’s young Selected leasing transactions, Q4/2013 students. The restructuring has significantly reduced the electronic GLA Tenant Trade Project Area market related tenants (Buynow and (sq m) others), and introduced more tenants to keep up with the tastes of the Chiuchow Garden F&B CITIC Plaza Sichuan Road (N) 1,200 younger demographic. Most of the new brands have been well received Life by City Super Lifestyle Raffles City People’s Square 900 by shoppers looking for affordably priced goods. Unlike most projects Loewe Fashion Jing An Kerry Center Nanjing Road (W) 773 in primary areas, the stores at the entrance to the mall remain non- Pizza Marzano F&B Hongyi Plaza Nanjing Road (E) 270 fashion/accessories tenants, and include KFC and the newly opened Lululemon Sports Rich Gate Xintiandi 115 Hershey’s flagship store, to maintain its friendly mass-market style. Source: Savills Research

Super Brand Mall in Pudong and strategy as leasing demand from although it is rumoured that some Raffles City in Puxi are among the fashion retailers remains weak in leases may have been signed. As a several malls that have adopted all but the most centrally located result of this restructuring, Huaihai the strategy of smaller store sizes. projects. Road (M) vacancy rates increased by Large-space tenants, such as Color 2.3 ppts to 7.7%. Jeans and Sport 100, have been Shanghai Times Square on Huaihai downsized or replaced by several Road (M) adopted a similar Despite slow leasing activity and smaller stores. This strategy creates strategy with a different method, by only moderate growth in rents, there a livelier atmosphere and enables the strengthening its department store are still quite a number of leasing landlord to better control the tenant anchor tenant. The recently renovated enquiries, although negotiations are mix and lease expiries, while from the project is anchored by Lane Crawford, taking longer. In Q4/2013, large-space tenant’s perspective, smaller units which occupies four floors and transactions were dominated by F&B are more affordable. Nevertheless, accounts for approximately 50% of and lifestyle retailers, while mainstream most projects, especially in non-prime total retail GFA. The high zones remain international retailers remain cautious areas, may find it hard to adopt this vacant and are still being marketed, and relatively quiet. 

Project focus Starry Sky Mall

 Developed by Shanghai by underground passageways to wider group of consumers by means Yahe Investment Company, Shuicheng Road Station (Metro line of its Metro connection. Starry Sky Mall is a 60,000-sq 10). m retail project in Changning  Starry Sky Mall is currently district.  The project has been restructured carrying out leasing activities and is and expanded from two existing expected to open in 2014.  The project is located projects – Peace Plaza and LA Plaza. between Xijiao Villa area and Both were opened in the early 2000s. Hongqiao CBD, surrounded by After about ten years of operation, mature residential communities. the two adjacent projects had already Within its 1-km catchment sit established themselves as popular two famous garden-style hotels leisure and dining destinations for (Hongqiao Guest House and surrounding residents. The new Xijiao Guest House) and one development will retain its positioning of Shanghai’s most popular as a mid-end lifestyle mall, adding hypermarkets, Gubei Carrefour. more retail categories. Meanwhile, It is also directly connected the project also aims to attract a

03 Briefing |Shanghai retail sector January 2014

OUTLOOK Flat retail rents for the city as greater concessions are provided by landlords of projects in decentralized areas.

 Eleven projects with a total  Slower economic growth,  Base rental levels of existing retail GFA of 1 million sq m restrictions on government luxury projects are not expected to are expected to be launched spending and the price premium see major corrections but some onto the market in 2014. Expo charged by retailers in versus new projects may have to lower (Pudong district) and Zhonghuan overseas will still all be major issues their achievable starting rental expectations in order to achieve and (Putuo district) areas will each for luxury retailers. The mid-range maintain higher occupancy rates. see over 200,000 sq m of new sector has been, and will remain, supply. the key driver of the retail real estate industry in terms of both leasing  Online shopping will continue to grow and evolve with more creative and consumer demand. But the  Looking further forward into methods for operation, promotion escalating homogeneity of tenant 2015 and 2016, the market will and even payment. This will force mixes and the conservative stances continue to see annual supply of landlords to spend time developing of retailers will be the key issue for around 1 million sq m. more flexible tenant mixes and adopt landlords. online technologies.

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James Macdonald Siu Wing Chu Aileen Zhong Jeremy Sun Associate Director, China Deputy Managing Director Director Director +8621 6391 6688 +8621 6391 6688 +8621 6391 6688 +8621 6391 6688 [email protected] [email protected] [email protected] [email protected]

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