It’s hard not to get worried about the mushrooming of malls across China amid a slew of reports on delayed rental payments and a supply glut that is bound to get worse when projects under construction hit the market.
The first mall project launched by beverage titan Zong Qinghou is reportedly behind its rental payments for six months, which translates to about 10 million yuan (US$1.6 billion), and he is now proposing to terminate the 16-year contract signed two years ago.
Waow Plaza opened in Zhong’s hometown of Hangzhou in late 2012 when the Wahaha chief proudly announced his plan to invest 1.7 billion yuan in 100 stores across the country. Only a few have opened so far.
Zong told mainland media he is not giving up on his plans. But the rapidly growing e-commerce trade, coupled with an increasing number of shoppers preferring to splurge abroad, will pose a big challenge to the inexperienced mall operator.
The prospects of the Waow project look even dimmer if we consider the overall overbuilding situation. Nine out of the 10 cities worldwide that created the most shopping mall space last year were in China, the Wall Street Journal reported, citing commercial real estate service firm CBRE.
In terms of space under construction, eight of the top 10 are Chinese cities, with Shanghai, Chengdu and Shenzhen leading the rest.
But with retailers holding back on their expansion plans in reaction to the government’s austerity campaign and China’s slowing growth, filling up all the malls is becoming a daunting task.
The Journal said oversupply may be most obvious in Shenyang in the northeast, home to fewer than six million people but second only to Beijing in retail space.
Hong Kong-based Hang Lung Properties (00101.HK) was once the darling of investors in view of its rapidly expanding China mall business.
More than half of its leasing turnover comes from China, with Shanghai and Shenyang being the biggest contributors. The company will launch a project in Tianjin later this year while its Wu Hang project already broke ground. Both cities are on the top 10 list of shopping center space completed last year or under construction.
Hang Lung stocks have been trending lower since hitting a peak in late 2010, and are now quoted at 40 percent under its historical high, and below its book value.
China Resources Land (01109.HK) is another big player. It owns about 2 million square meters of commercial properties, half of them shopping centers. Another 6.5 million square meters of investment properties are in the pipeline, comprising 11 of the company’s signature MIXc malls and 24 Hi5 malls. Most of the projects are scheduled to be completed this year and the next.
Shopping malls can be good business. They generate steady cash flow and yield becomes very lucrative when projects mature in a favorable rental trend. But as opposed to build-and-sell model of residential developers, commercial landlord’s build-and-hold approach demands lots of capital. Idle or troubled projects can be real bloodsuckers. Just think of the current headache of Waow Plaza’s landlord.
Unlisted Dalian Wanda, the biggest commercial property group in mainland China, is also harboring doubts about the business. But its chairman Wang Jianlin should be credited for his agile response to the changing environment.
Wang, China’s richest man, initiated a transformation process years ago to shift the company’s focus to entertainment. With cinemas and amusement parks improving its properties’ attraction and generating diversified income streams, Wanda seems better prepared to survive the oversupply pressure.
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