As China’s middle class continues to grow at an unprecedented rate, its cities and retail sector have been changing rapidly. But what can we expect from these areas in the next few years?
JLL.com has been monitoring the “China60,” or a group of 60 secondary and tertiary cities, to discover trends in today’s commercial real estate market. China’s major cities, Beijing and Shanghai, “have established and maintained considerable ‘distance’ from the China60,” and their global connections and assets rank them among the world’s top ten city economies. But the economic influence of lower-tier cities, as JLL shows, is on the rise.
China’s Urban Network
JLL’s 2015 City Evolution Curve “reveals a hierarchy that is showing signs of stability” among the China60.
Since 2012, cities in the western and central regions of China have generally displayed the greatest development. These include Kunming and Guiyang in Southwest China, Xi’an in the Northwest, and the central cities of Shijiazhuang and Zhengzhou. Their advancements can be attributed to shifts in economic activity, new government policies, and infrastructure investment.
Though inland cities in China have seen greater advancement than those on the coast, some coastal cities are displaying incredible economic progress. Xiamen and Wenzhou, for instance, are booming because of upgrades in their industrial sectors and improving external demand.
The Tier 1.5 cities in the China60 list have also “cemented their positions as thriving regional commercial hubs and have extended their lead over Tier 2 cities.” This year, Xi’an moved into the Tier 1.5, having established itself as a hub for Northwest China. Tianjin and Chengdu remain the top Tier 1.5 cities. In Central China, Wuhan has demonstrated the greatest improvement in property scores.
The Tier 1 cities of the China60 are in the midst of “profound restructuring,” but remain the commercial centers of the Pearl River Delta (PRD) region. Their industrial sectors make them strong candidates for further commercial advancement. Shenzhen is particularly notable for its technological power, environmental sustainability, and financial sector.
PRD cities benefit from close proximity to Hong Kong and strengthening intra-regional connectivity, but it is the Yangtze River Delta (YRD) cities that have made “the greatest economic and real estate advances since 2012.” The Capital Economic Region, centered around Tianjin and Beijing, is less integrated, but plans for further regional development are in the works.
The China60 Retail Market
China’s growing middle class is changing the face of the country’s retail market. Of the nearly 300 million people living in the China60, 130 million are from households earning more than RMB 30,000 (US$5,000) annually, a number which has almost doubled since 2011. A further increase of 70 percent to 220 million consumers is expected for 2020.
Consumer behavior has also changed accordingly. Shoppers in the China60 have taken to e-commerce at an incredible rate, and a rise in overseas travel has also made them “accustomed to higher levels of service and richer in-store experiences,” according to JLL. As a result, consumers are more sensitive to prices and discerning of their purchases than ever before.
Shopping malls continue to spread across the China60, though consumers in lower-tier cities are still adjusting to the mall as a retail outlet. Retail sales growth in the double digits during the period 2005-2012 has spurred the expansion, with developers looking to retail as a “panacea” to generate long-term revenue, encourage residential sales, and enhance the profile of their mixed-use developments.
Since 2011, shopping malls have become especially prevalent in inland Tier 1.5 cities, including Wuhan, Xi’an, Chongqing, Shenyang, and Chengdu. Developers are looking to “tap the deep consumer base and inflow of customers across a wide geographic area.” Potential for growth remains, however; Tier 1.5 cities have the capacity to expand their stock by another 60 percent during the next three years. Market saturation, however, is expected to cause a slowdown this year to annual stock growth in the single digits. Though oversupply of shopping mall stock is projected to become a problem in Tier 1.5 cities, high-quality malls remain scarce; JLL estimates that only 10 to 15 percent of existing mall stock is up to international standards.
The proliferation of shopping malls has created a competitive marketplace and a “winner take all” environment. But JLL reports, “In spite of large shopping mall stocks in Tier 1.5 cities, successful ‘third generation’ malls are continually leveraging their good positioning, tenant mixes and layouts to consolidate their positions as citywide destinations as well as to achieve high levels of sales productivity.”
Omni-channel retailing is also expected to become a “major force” in the China60. With Chinese shoppers becoming more and more accustomed to online shopping, it is vital for retailers to offer sales channels across both online and offline platforms. Bricks-and-mortar enterprises are “embarking on e-commerce strategies and seeking to improve in-store service” to keep up with the rise in online shopping.
The status of the luxury retail in China remains uncertain, as the market is still feeling the effects of President Xi Jinping’s 2013 austerity push. Lower numbers of newly affluent households and slower growth in the private sector have also “arguably reduced the growth of funds available for high-priced goods.”
image credit: remko tanis