06 May 2014
By Alastair Hughes, Asia Pacific CEO at JLL and a member of the company's Global Executive Board.
We are all now very used to hearing about globalization. And you only have to visit any major city across Asia to see that globalization is taking place in the retail industry. From Manila to Mumbai, Shanghai to Sydney and Tokyo to Taipei shoppers will increasingly come across familiar, established international luxury brands, more affordable high-end goods from companies such as Coach and Kate Spade, as well as mid-tier offerings from the likes of Zara and Abercrombie & Fitch.
Buyer and seller
International retailers are looking to expand in Asian markets, because they believe in the Asia growth story. Ongoing rapid economic growth means rising urbanization and living standards, a growing middle class, higher incomes and with that, increasing consumer spending power.
At the same time, real estate investors are recognising this potential. In the past year, demand to buy retail real estate has rocketed. New capital raises, increasing allocations to real estate, and growing private capital as the world continues to recover after the global financial crisis resulted in over $21 billion being spent on retail real estate in Asia in 2013; that's up more than $6 billion compared with the year before. There is a lack of stock available for buying in the region, and this excess demand will keep prices high. There are signs that investors are moving up the risk curve to buy less core assets in markets, where perceived good value can be found. International investors in Japan, for example, are starting to look at locations outside of Tokyo.
Japan and China last year dominated trading activity in retail real estate, together making up nearly three quarters of total transactions in Asia. We think investor demand is going to focus on Japan again this year, helped by the devaluation of the yen, the uptick in economic growth, the spread of growth beyond Tokyo and the major cities, as well as investors recognizing the sheer size of the economy and the wealth of the Japanese population. In China, domestic investors are expected to remain strong buyers in the country, as the weight of domestic capital for investment grows. We also think international capital will target China, but focused on the upper-tier cities. Investors will look to avoid being exposed in remote and less transparent China locations, where prices remain relatively high on a comparative basis.
Do your homework
Factors such as location, transport links, design and ambiance, brands on offer, food and entertainment that's available, all contribute to the overall shopper experience and can make or break a mall. Investing in a mall or shopping center is not just about owning a building -- it's more akin to owning a business and a specialist one at that. Investors have to be aware of demographics, and the importance of marketing. For a mall owner, the success of their retail tenants is to some extent reliant on the quality of the management, in a way that just does not exist in the office sector. Throw in the challenges presented by e-commerce, which is booming in Asia, plus the fact that many retailers are using their stores as much to build their brands as they are to sell their products, and you have a pretty complex business to manage.
More so than any other types of property, there is the propensity for investments in retail real estate to go badly wrong if investors fail to do their homework when purchasing, or don't have the necessary skills to appropriately manage buildings once acquired. Historically in Asia, developers have built and the retailers have showed up. But because of continuous shopping center development and e-commerce expansion, retailers are becoming more discerning. Get it right however, and it's a very different story.
Location, location ...
While shopping malls are complex in nature, they are attractive to investors because they are one of the few asset classes that can be managed to produce significantly higher returns. Owners with specialist knowledge and true asset management capabilities will be able to drive superior returns from a multi-let retail asset compared with many of their peers owning long-let office or logistics assets.
For retailers, the huge prize of access to the vast and growing consumer base of Asia is compelling. The macro story is incontestable. Understanding the micro story, market by market, street by street, is, however, just as important and far more challenging. Each market has different laws governing access to international retailers, different property dynamics and different consumer buying preferences.
For those looking to set up or expand retail outlets in Asia, or those looking to invest into retail real estate, a good starting point is to be guided by that old property adage -- location, location, location.
This article first appeared in the Nikkei Asian Review