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THINK China: Tomorrow's World underpins the case for outlet malls

In our latest research report, Harry Tan (Head of Research, Asia-Pacific) examines the outlook for outlet malls in China.

The report acknowledges that China’s economy is slowing and faces significant headwinds, but finds that macroeconomic conditions remain supportive of continued expansion. China’s policymakers have enormous financial reserves at their disposal and have a history of taking monetary and fiscal policy action to address economic challenges as they arise.

In addition, the research shows that China’s slowing growth has a silver lining for the outlet mall sector: slower growth is one symptom that China is shifting away from investment and credit-driven growth to consumption-led growth. Whereas the services and consumption sectors accounted for just 42% of the economy as recently as 2006, in 2015 it accounted for just over 50%.

The Chinese government has already accelerated fiscal spending to boost the economy in the near term. At the same time, it is taking policy steps to lay the foundations for more stable, albeit likely slower, long-term growth. This includes the recent lowering of mortgage down payment requirements, which has strongly supported the housing market in the year to date. Overall, we see these actions as highly supportive of domestic consumption as a driver of economic growth in the years to come.

Indeed, the shift to consumption-led growth is being driven by a combination of powerful long-term social and economic trends. These include:

  • Ongoing urbanisation and the tendency for urbanites to consume more;
  • China’s rising middle class and their increasing disposable income;
  • The country’s aging population and the propensity of the aged to save less and spend more;
  • Policy reforms such as expansion of China’s social welfare system, which is freeing up household funds for consumption.

Against this backdrop, we highlight that designer outlets have been one of the strongest performing real estate sectors. Designer retailing has been benefiting from a strong appetite for luxury goods from China’s emerging and increasingly urban middle class. Designer outlets, and the outlet malls that host them, are proving to be particularly well placed as middle class buyers are generally more price sensitive than the high-net-worth individuals who pioneered China’s luxury shopping habits. Finally, these middle class buyers are attracted to the ‘shopping experience’ of visiting attractively designed outlet malls as a day trip.

While shopping mall yields in tier-one cities in China have fallen amid market saturation over the past five years, we find that China’s outlet mall space per 1,000 target population was only 3.6 sq m in 2014 – less than 1% of the US level and about 10% of the level in Europe.

This points to huge potential to open new outlet malls in currently undersupplied tier-two and tier-three cities, and represents a significant potential investment opportunity for investors looking for exposure to China’s outlet mall sector.

Download the report

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