Faced with slowing growth in China's apartment boom, foreign developers are turning to shopping centers, betting strong consumer spending and an influx of retailers will boost demand and push up rents.
But the payoff in the immature market is anything but assured, with single-digit yields and regulatory hurdles scaring off those looking for a quick profit.
Singapore's CapitaLand Ltd. bought two
Beijing shopping centers this month for about US$220 million and said in December it would invest US$120 million in a venture with a Chinese firm to buy and run malls housing U.S. giant Wal-Mart.
Analysts said retail deals were also considered by other developers already in China, such as
Hong Kong Land, local rival Hang Lung Properties as well as newcomers such as U.S. developer Simon Property Group and European pension funds.
"A number of retailers have been in China looking around, and many of them will make the leap," said Michael Hart, head of research at property consultant Jones Lang LaSalle in Shanghai.
"So, if you¡¯re a landlord in Shanghai, you've got more potential tenants chasing the same amount of retail space."
British supermarket operator Tesco Plc. and luxury goods maker Gucci, owned by France¡¯s Pinault Printemps Redoute, are among the retail giants dazzled by China¡¯s burgeoning consumerism.
Only about 6 million households in the country of 1.3 billion people earned more than US$10,000 a year, but that number would triple by 2009 if the economy expanded an average 7 percent per year, New Zealand research firm Asian Demographics Ltd. said.
Last year, China¡¯s economy grew 9.5 percent while retail sales jumped 13.3 percent.
Foreign retailers are encouraged by the government¡¯s moves to deliver on free trade promises to the World Trade Organization.
In December, the government allowed overseas players to own 100 percent of their Chinese operations, let them set up shop anywhere in the country and cut the minimum registered capital to 300,000 yuan (US$36,230) from 10 million yuan.
Just as significant, rent as a proportion of sales turnover has risen to about 40 percent from 30 percent in the last two years as vacancy rates fell to 7 percent from 15 percent.
Husband Retail Consulting said a handful of high-end projects were under way in Beijing, including Kerry Properties' China World Trade Center and
Hong Kong International Group's Fortune Plaza.
Foreign retailers are also keen on other heavily populated cities, such as Dalian, Xi'an, Shenyang,
Harbin and Chengdu.
Although some Chinese developers have become more responsive to what foreign retailers want, many are out of favor because they have sold parts of their shopping centers to investors and lost control of the tenant mix.
"If you lose control of the merchandise mix, you won't attract quality retailers and restaurateurs," said Paul Husband, who founded Husband Retail.
Any property investor looking at the retail business in China needs to be there for the long-haul, analysts say, because often the best way to make a profit is to buy up neglected or badly run shopping centers cheaply, refurbish them and overhaul management.
Most foreign investors prefer the fast cash turnaround from building and selling homes. But the government ¡ª trying to reduce a speculative bubble in the
Shanghai and
Beijing residential markets ¡ª is turning to land auctions rather than private deals, making it more difficult for foreign developers to buy prime residential sites cheaply
