Shanghai RetailAsian Cities Report – 1H 2020

REPORT

Savills Research

savills.com.cn/research

Shanghai Retail

Shanghai retail adjusts to a new reality

OVERVIEWThe retail market was one of the hardest hit by the outbreak of COVID-19 and subsequent social distancing and travel restrictions. This proved true in Shanghai as retail sales fell 20.4% year-on-year (YoY) in the fi rst quarter of 2020 on the back of the city lockdown and temporary store closures in response to COVID-19. Additionally, no new supply launched onto Shanghai’s retail market, and the launch date of future projects remains uncertain. Many stores in Shanghai were forced to close for a month to two months, either in response to government measures, staff and customer safety concerns, lack of business, cost-cutting or staffi ng shortfalls.

Many retail businesses run very tight ships, with high costs and profi t margins continually squeezed. Small-and medium-sized enterprises, in particular, might only have a few months operating capital available. Catering and accommodation sales fell 42.4% YoY in the fi rst quarter of 2020. Most restaurants, even ones with higher unit prices, introduced food delivery services to support turnover. On the other hand, retailers like supermarkets saw revenues increased signifi cantly in response to home quarantine measures, while general retail brands, fi tness centres, education intuitions and training companies utilised online platforms to off set lost income from physical stores.

VACANCY AND RENTCitywide vacancy rates increased by 0.1 of a percentage point (ppt) in Q1/2020 to 8.5%. Vacancy rates in prime retail areas in Shanghai increased by 1.4 ppts quarter-on-quarter (QoQ) to 7.4%, while non-prime retail areas fell 0.2 of a ppt to 8.7%. Some smaller F&B brands that were under cash fl ow pressure permanently closed stores, while demand from pop-up stores and temporary exhibitions also fell, resulting in an increase in vacancy rates across Shanghai.

First-fl oor rents were fl at in Q1/2020 at an average of RMB27.5 per sq m per day. Prime retail areas and non-prime areas rents remained unchanged with rents registering at RMB49.5 and RMB16.7, respectively. Most landlords gave rental concessions of approximately two weeks as a temporary measure in response to COVID-19.

While these rental concessions made by landlords and deferments or deductions to tax and social security payments were helpful, there is only so long that some stores can remain afl oat, and revenues are not going to be able to recover to pre-crisis norms for many retailers. Soon, layoff s and permanent store closures will be inevitable, especially for recently-opened, independent stores.

MOVING FORWARDAcross Shanghai, the resumption of work increased footfall, and people have started to fi lter into restaurants and walk around on the streets by the end of March. This has given a sense of normality to the city and encouraged others to go out a bit more. Reopening of stores and resumption of regular hours was staggered depending the risk category (cinemas are starting to reopen as of mid-May) and measures to prevent the spread of the virus remain in place in many locations, though, generally speaking, they have become more relaxed as time goes by and the number of newly diagnosed cases remain low.

Community malls and projects that have adopted digital enhancements and online platforms seem to have been less aff ected by COVID-19 and the subsequent social distancing measures. The virus has proven that the 15-minute catchment location for community malls is becoming an increasingly important benchmark for projects as competition rises.

Technology is expected to become even more pervasive in this sector as a response to COVID-19. A key area of focus is likely to be online analytics expanding into offl ine environments through the development of IoT and 5G technologies and the seamless integration with mobile devices. New retail categories are expected to pop up and fl ourish, such as E-gaming, online classes,

GRAPH 1: Shanghai Mall Supply & Vacancy, 2014 to Q1/2020

Source Savills Research

GRAPH 2: Shanghai Retail Rental Index, Q1/2014 to Q1/2020

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Source Savills Research

GRAPH 3: Shanghai Quarterly Retail Sales, Q1/2014 to Q1/2020

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Source Savills Research

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Mall Supply (LHS) Vacancy Rates (RHS)

Shanghai Retail

etc. While some of these may be mostly online, they are likely to have multiple physical touchpoints—E-games arenas, pop up promotions, paraphernalia shops, experience centres, etc.

In terms of mall design, open-plan designs may become more popular, with natural ventilation and many other WELLness principles and sustainable ESG concepts. At the same time, malls will increase their resilience to outside risk factors such as pandemics, extreme temperatures and fl ooding, will be combined with fl exibility and the ability for projects to adapt to change.

The biggest downside risk for Shanghai’s retail market is a slower recovery in the domestic economy, resulting from a global economic contraction/recession. Nevertheless, the retail market, in China in general and Shanghai in particular, has been one of the most innovative sectors of the Chinese economy with product categories, retailer business models, distribution and marketing channels and consumer fi nancing leading global change over the last fi ve years. Shanghai represents a consumer market that is on its road to recovery and, given its size and infl uence, is hard for retailers to pass up.

Shanghai remains a consumer bright spot. Eff ective virus controls, work resumption

and recovering consumer confi dence buoy retailers’ optimism in the city.

GRAPH 4: Consumer Confi dence Index, Q1/2014 to Q1/2020

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Consumer Confidence Index Satisfactory Expectation

Source Savills Research

TENANT CATEGORY PROJECT AREA GLA (SQ M)

Inlove KTV Leisure & Entertainment Aegean Place Qibao 1,350

OCE Home & Lifestyle iAPM Huaihai Rd (M) 1,100

Levi’s Fashion Mosaic Shanghai Nanjing Rd (E) 950

Gap Fashion Westlink Plaza Xinzhuang 850

TABLE 1: Selected Leasing Transactions, Q1/2020

Source Savills Research

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