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Oversupply disrupts China's retail leasing market

People walk along the Sanlitun SOHO residential and commercial complex in Beijing.


To see evidence of a slowing in the retail leasing market in China, you only need to take a lonely stroll through the basement level of Sanlitun SOHO, a much-anticipated development in a prime area of central Beijing.

Stationed at the top of a long, empty corridor, Flour patisserie and bistro should be serving coffee, sandwiches and cakes to the well-heeled foreign and local office workers and diplomats from nearby embassies and offices.

Instead, server Huang Xiuxiu is lolling behind a counter, the strains of a Norah Jones ballad echoing in the empty hallway.

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"The structure of this area is confusing. It's hard for a customer to remember how to find us," said the 23-year-old, explaining the empty shop. "The business here is not very good … It takes time for people to get to know there is a new shop in a new mall."

The many half-empty corridors of this complex of five sprawling towers, which has been open two years, is an indication of a wider trend, retail analysts are beginning to warn. Caught up in the heady rush of the world's largest consumer market and a booming economy, Chinese retail developers may have built too much, too quickly.

"It's all happening a little bit too fast so there's no opportunity to say this … is becoming oversupplied; there's no chance to catch a breath and look at how the market is developing, because you have to move fast in this market," said James Hawkey, executive director of retail services for Cushman and Wakefield in China.

Though Mr. Hawkey cautioned against too much pessimism in what is still the world's fastest-growing consumer market, he said second-tier cities in particular will notice more vacant shop fronts in the next year or two as a result of overeager developers.

"In the next few years there will be lots of new supply of office and retail and some of it will experience some problems. The more experienced developers … will suffer less and their projects will, generally speaking, be successful. Some of the smaller developers … may have trouble attracting powerful international brands to keep their developments going," Mr. Hawkey said.

China's residential market still makes up 70 per cent of all real estate activity and, until last fall, was roaring into what many predicted was a massive bubble. Fuelled by an air of general excitement, easy money under loose bank lending policies, and the promise of the world's big brands moving into China, developers turned their eye to retail and commercial projects.

Now those projects are coming of age as the country's gross domestic product growth rate is slowing, with a government target of 7.5 per cent this year.

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"As with anything in China, you see a lot of the herd mentality. But some of that unbridled bullishness towards commercial [real estate]has cooled a bit," said Michael Klibaner, regional director and head of China research for Jones Lang Lasalle.

Some flashy new developments are poaching tenants from older buildings, leaving them empty and echoing. In others projects, poor management has failed to attract tenants. It's common for developers to sell retail space piecemeal to individual owners, as they would with residences, but a single, small-scale owner has little hope of attracting a big brand to that space.

A short walk from Sanlitun SOHO, for example, another mall, the Village, is considered one of Beijing's more successful developments in part because Swire Properties, a leading Asian property developer and manager, has been able to attract flagship tenants including adidas and Apple.

That means staff at the Mai Tian leasing company in Sanlitun SOHO have their work cut out for them. They say occupancy rates in the complex range from 20 to 80 per cent, building by building.

"The market is getting better," said Saya He, Mai Tian's team leader, adding that the complex's occupancy rate has picked up since they first started trying to lease its shops nearly three years ago.

Some of a glut of retail space may be temporary, until the buying power of China's expanding middle class catches up to the shops around them.

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"Demand is growing really quickly in China. Retail sales of 17 per cent in 2011 … is still a pretty significant number. But supply is growing even faster," Mr. Hawkey said. "The retail market in China is one of the investment opportunities of this century, I believe. The problem is, everyone has seen that."

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