Unlocking potential in retail property sector
Updated: 2011-05-27 06:18
(HK Edition)
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Along with China's strong economic growth, demand for high-end retail goods and retail space has grown strongly over the past few years, with the huge untapped potential of the sector being unlocked amid favorable economic fundamentals and policies.
The increasing relevance of the retail sector for investors is supported by the fact that retail property investment has achieved a 25 percent average annual growth rate over the past 10 years through end-2010. DTZ Research estimates that over the past eight years, as much as 2.3 trillion yuan has been invested in Chinese retail property.
The single most important economic driver for high-end retailer investors is retail sales. Retail sales have more than doubled in the past eight years in China - from 4.8 trillion yuan in 2002 to 15.4 trillion yuan in 2010. This implies an average growth of 17.74 percent per annum (pa) over this period.
Going forward, Oxford Economics project retail sales growth of 9.5 percent pa in China between 2011 and 2015. This is consistent with our own view that the country's retail sales will remain strong and by 2015 we expect China to have truly solidified its status as one of the most important retail sales markets in the world.
The key macro fundamentals that will drive retail sales growth are: robust GDP growth to support the continued rise in disposable income, change in government policies that should trigger more disposable income to be spent rather than saved and urbanization to bring more retail spending into cities.
China is the second-largest economy in the world after the United States by purchasing power parity ($8.77 trillion in 2009). Looking forward, the country's economic growth is set to continue. Oxford Economics predicts that between 2010 and 2019, China's gross domestic product (GDP) will grow by an annual average of 8.6 percent. Despite being lower than the average growth of 9.9 percent over the past 31 years, GDP growth is expected to remain higher than any other major economy.
GDP growth has resulted in strong growth in disposable income. Disposable income rose year-on-year by a solid 7.8 percent in 2010. The average annual growth rate for the 1991 to 2010 period was 8.3 percent. Forecasts for the next five years from the China Institute for Reform and Development show nominal disposable income growth at 15 percent. When CPI growth is taken into account, the real growth rate is estimated to be around 12 percent over this time, well ahead of the 8.3 percent historical average.
Two years ago, China was hit by the global financial crisis. Since then, there has been much discussion as to whether the economy should remain reliant on both exports and investment in infrastructure and heavy industry. Diversification of its economic base by encouraging greater domestic demand is an attractive option. If China adopts more policies designed to boost domestic consumption then we are likely to see private consumption increase, which will boost retail sales. It is expected that the 12th Five-Year Plan will seek to encourage greater domestic consumption within China's economy.
Based on the anticipated shift in policy, I believe a reasonable figure for private consumption as a percentage of GDP would be around 55 percent by 2020, an increase of 9.6 percentage points from the figure achieved in 2009.
China's strong economic growth and rising living standards have driven a massive movement of people from rural to urban areas and from small towns to large cities. As of 2010, 47 percent of its population lived in urban areas. By 2030, the urbanization rate in China could reach 61.9 percent. As a consequence, around 905 million Chinese citizens are predicted to live in the nation's cities by 2030.
To facilitate the massive inflow of urban residents, up to 170 new mass transit systems could be built in China by 2025. As metro system networks, for example those in Beijing or Shanghai, have branched out to the suburbs, people looking for a home have been able to buy more affordable housing in these suburban areas. Following this, these cities have also seen a shift in retail with more shopping centers being built to serve these new suburban communities once a certain critical mass is established.
For high-end retailers and shopping center developers and investors, the extent of the country's urbanization will augur the development and growth of significant new markets with the State Council's Development Research Center suggesting China's urbanization will boost domestic demand's contribution to the economy by 30 trillion yuan in 2030.
Thus to recap, I feel very positive regarding the growth of retailing and in turn the growth of the retail property sector in China. As China's economy grows, as incomes rise, as greater domestic consumption is stimulated, as the process of urbanization continues and as new transportation infrastructure is completed, this growth is expected to be realized across all cities in China, be they first-tier cities, second-tier cities or third-tier cities.
The author is head of East China research at DTZ. The views expressed here are entirely his own.
(HK Edition 05/27/2011 page2)