Shenzhen’s retail market face concerns despite expansion

Retail sales of consumer goods fell in the first quarter.

Despite the gradual expansion of the retail sector in Shenzhen over the past two years, the leasing market for the sector has shown growing concern for the effects of recurring COVID-19 cases and related restrictions, according to a report from Savills.

The report noted that Shenzhen’s strong economic and demographic fundamentals provided a solid foundation for the development of the local consumer market, showing solid growth in its gross domestic product, retail sales, and consumer expenditure.

These positive indicators rendered strong support to the growth of many retailers new to Shenzhen or at least helped enhance the confidence in expanding in the locality, Savills said.

As consumption is upgraded in the city in terms of fashion taste and increasingly metropolitan lifestyle, retail brands spanning from luxury to chic and fashion labels have also become widely known to the locals, spurring store openings in the city over the past two years.

“On top of that, although the suspended cross-border travelling resulted in a lock-up of consumption of luxury products within Shenzhen, it gave a bigger room for luxury brands to rapidly expand their business in the city,” Savills said.

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Despite these, Savills noted that most institutional investors have perceived the polarisation of leasing activities and outcomes by asset type (core/core-plus versus others) and how it will affect the post-acquisition asset performance and subsequently, their exit strategies and related investment decisions.

“Clearly, the collective impacts of the current economic climates, COVID disruption, limited investable assets and increasingly dented market confidence have slowed down both the national and local retail investment activities,” Savills said.

Moreover, the market is noted to face a growing concern for some negative impacts of the COVID-19 prevention and control measures that resulted in an inability of retail businesses to operate under the circumstance of COVID outbreaks, further dampening the confidence of retailers or business operators in the market.

The city’s retail sales of consumer goods fell 1.6 ppt YoY to $31.47b (RMB210.7b) during Q1, with the food and beverage sector suffering the most since the implementation of the ban on dining at restaurants. 

In addition, a survey by Shenzhen Retail Business Association revealed that 80% of shopping centres dropped by over 15% YoY in both sales and footfalls during the same period.

“Retailers, partly if not all, are reportedly becoming more prudent as they tend to hold back their expansions or leasing activities. This is expected to bring about some negative impacts on the already lacklustre leasing market performance in the remainder of the year,” Savills said.

Despite these issues, Shenzhen’s retail property market is still expected to continue gaining prospects, and core and core-plus investment opportunities should continue to attract some selective institutional investors in the long term.

This could be reinforced by the economic fundamentals and the upgrading needs of the local consumers, Savills said.