China’s recent growth slowdown is unlikely to affect returns in the country’s flourishing outlet mall sector due to changing consumer demands and shifting government policy, according to TH Real Estate.
A new report from the UK company (which is offering investments in this sector), entitled THINK: China, notes that the rise of middle-class consumers with a “strong appetite for luxury goods but sensitivity to pricing” makes designer malls a promising area of investment.
“Unlike other core real estate sectors, where market cycles have become more pronounced, designer outlets have proved to be relatively immune to cyclical economic and real estate market swings,” the report said.
Outlet malls in Tier two and three cities offer the best potential, TH Real Estate said, based on data that shows Chinese shopping mall stocks’ compound annual growth rate (CAGR) for the 2008-2014 period was 21 per cent per annum, but Tier one cities’ stock had a CAGR of only 12 per cent per annum in that same period
TH Real Estate said this indicated a shift in retail activity “from Tier one cities towards the rest of the country”, adding that Tier two cities have the potential to “expand their stock by another 60 per cent over the next three years”.
“The outlet mall market in China is far from saturated and has room to reach global norms in the coming decade as the market continually evolves and matures,” the company said.
In addition, outlet mall consumption is likely to grow further with the rapid growth of China’s “cost-sensitive” middle class.
“The rise of the middle class and rapid urbanisation have led to robust growth in disposable income; and due to aggressive mainland expansion by luxury brands in recent years, Chinese consumers have gained better brand consciousness,” the report said.
TH cautioned investors to watch for oversupply, noting that “a risk to investing in any emerging market is the pace of development overtaking that of occupier demand”.
Nevertheless, strong structural growth in the retail sector, especially in Tier two and three cities, makes for an attractive investment opportunity so long as investors are capable of “understanding local market dynamics and targeting dominant, well anchored schemes”, the report said.