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Rise in spending power is luring major developers

SHANGHAI: Policy risk is driving both developers and foreign investment funds away from China's residential market and towards commercial property, say analysts.

And it is a trend that, once under way, could continue for several years.

In addition to the "push" factor of increased risk caused by the introduction of measures aimed at curbing the growth in home prices, the shift in focus has arisen because of the rise in consumer spending power.

Beginning in April this year, the government in Beijing has announced a series of measures to take the speculative heat out of the residential market, included the tightening of residential development loans to developers, increasing mortgage rates and cutting mortgage loans to individuals.

Norman Krone, president of NK Real Estate Advisors, a Florida-based property consultant with an office in Shanghai, says this is leading developers and investors to put greater emphasis on retail real estate.

He believes the trend will last for many years.

A number of big developers are currently raising their investments in retail properties in Beijing.

China Vanke — China's largest public-listed residential developer in terms of market capitalisation — is building a 100,000 square metre shopping centre, while Sino-Ocean Land — in a venture with Swire Properties — is constructing an 860,000 square metre mall, also in Beijing.

Hong Kong-based New World China last week said it had teamed up with a local developer to buy a residential and commercial site in Beijing for 820 million yuan (RM383.57 million).

The 267,918 square metre site in the Shunyi district could include housing and offices and provide a total gross floor area of 200,012 square metres.

Also last week, Shui On Construction and Materials last week said it bought a 51,000 square metre space at a commercial project in Shanghai's Pudong financial district for about one billion yuan.

Grosvenor Fund Management, partly owned by the privately-owned international property development and fund management group Grosvenor of Britain, recently acquired a 126,000 square metre retail development in Shanghai for 1.7 billion yuan.

Stanley Ching, senior managing director and head of real estate at Citic Capital Holdings, said property investors were exploring what they saw as the next big sub-markets as policy risks in the housing sector grew.

Citic Capital is developing a shopping centre in Changsha, and says it will shift its focus to the retail sector in the future.

On the back of an expanding residential market, an improvement in domestic consumption will increase the need for retail properties, investors said.

China's retail sales of consumer goods grew 18.6% in October year on year as the fastest growth among major economies spurred spending.

Urban consumption hit 1.24 trillion yuan in October, up 18.9% year on year. Rural residents spent 188.9 billion yuan on consumption goods in October, up 16.8% year on year, according to the National Statistics Bureau.

"Many retailers from Asia, including Hong Kong, are entering China in view of this growing consumption power. It is the right time to build the platform," said Ding Hui, managing director of Inter Ikea Centre Group China (IICC).

Tapping into the rising consumption power in the world's most populous nation, IICC is building shopping centres in Beijing, Wuhan and Wuxi at a total investment cost of US$1.2 billion (RM3.72 billion). As China's economy expands, domestic consumption will rise, said Ding, and this process is now well under way, based on Ikea's own experience since it started operating in China 12 years ago.

It very quickly saw its Shenzhen and Chengdu outlets topping the list of the group's 300-plus shops in terms of turnover growth, said Ding.

International retailers have their eyes on this growth potential, with retailers in Singapore, Hong Kong, Korea and Japan entering the market.

"There is a huge consumption potential in the market. Urbanisation is growing at a fast pace and the government makes a lot of effort in the development of infrastructure. That benefits the development of retail properties," said Ding.

Krone said the trend by investors to place greater emphasis on retail properties was likely to continue.

"The official policy of the central government is to encourage spending of some of the increased incomes on consumer goods instead of just saving the additional amounts.

"This indicates the average citizen will increasingly become a shopper or buyers of consumer goods."

In view of the positive outlook, Ding said IICC was looking at the possibilities presented by expanding in Shanghai. "Ikea, the home furnishing retailer, plans to open 18 outlets by 2015. We hope to follow this step," he said.

Meanwhile, he was not concerned about an oversupply of shopping centres in China. — South China Morning Post
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