Real Estate Q-series: Great Mall of China - Will retail survive or thrive in a post COVID world?

China has much lower retail space per capita than other markets, under-consumption, and a lack of quality mall operators, which is where we think China's structural growth potential comes from.

07 Jul 2020

China has much lower retail space per capita than developed markets

Source: International Council of Shopping Centres, Cistri, Euromonitor (NLA:net leasable area)

This chart show China's shopping center floor space per capita and retail sales growth.

Future of shopping malls reimagined, but not quite as you think

Our recent Q-Series that identified the 7 Megatrends for the Future highlighted that due to COVID-19, seismic shifts are taking place in retail trends with potentially far-reaching implications for the property sector. We challenge conventional wisdom and expect China's shopping malls to thrive over the next decade. Our analysis shows the online threat is significantly less than in other countries, retail is still underpenetrated, and a rapidly approaching US$200bn REIT market provides mall developers with a previously lacking, vital capital market. We coordinate with more than 20 global analysts—across real estate, luxury, internet, consumer and leisure—to examine the structural threats and opportunities within a global context and zoom in on the unique path for malls in China (a US$2.6trn market cap/ 14% Compound annual growth rate (CAGR) by 2025E in our upside case scenario).

Structural drivers to support China's malls, and how to pick the winners …

At 28%, China has the highest online retail penetration in the world. Globally it has one of the lowest retail space per capita but has among the highest retail sales growth. Digging deeper, UBS Evidence Lab has built a catchment-area database for 600-plus Chinese malls and 400-plus European malls, and we have built a database of 400 malls' rental data in China. We think partnerships with online giants and polarisation towards 'experience or convenience' will be the key drivers of success. Malls excelling at neither will be stuck in the middle and lose market share.

China public REITs: game changer with a Rmb1.3trn market

We view the recent infrastructure REITs announcement as a milestone for China's public REIT development and a trial run for potential property-asset REITs. It could mark an important turning point for the sector, providing a critical transactional market for developers to recycle capital at a time when a 15-year residential super-cycle is slowing. We think China property-asset REITs may come by 2022-23 and estimate they may be worth Rmb1.3trn (US$200bn).

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