Why Asia’s landlords face a plodding recovery


Again this year, Asian economies look set to lead the pack for overall economic growth. The International Monetary Fund, in its latest World Economic Outlook, forecast global growth of 2.7 per cent, but almost twice that much, 4.9 per cent, for Asia.  Household spending on retail goods and services is set to continue the recovery it started in 2022. But how that translates into metrics that landlords are particularly interested in, such as rent and occupancy growth, is subject to another su

suite of factors that might not be particularly supportive.

Three factors are of special concern. The first is the perennial issue of whether or not the various markets can absorb the new space becoming available as developers open the doors of their newest projects. That may be an issue in cities such as Bangkok, Phnom Penh, Hanoi, and Ho Chi Minh City, where substantial new space is coming online. A second factor in the coming year is retailer caution: sales might be recovering satisfactorily, but investment in new stores looks set to remain muted, even as consumers start wanting to come out in greater numbers as Covid-19 restrictions ease. 

And the third factor is history: there is a school of thought – understandably strong among retailers – that rents were set too high leading up to the pandemic and that the period from 2020-22 reset them at more realistic levels. A retail rental index for shopping malls in the APAC region prepared by JLL shows that by the third quarter of last year rents had retreated to roughly the level they were about 10 years ago.

All this means that, to fill space, mall and strip landlords will have to work harder, employ more pop-ups, and be more willing to lease to local and first-time tenants. The big names will be tough to get.

The past as prologue

At the beginning of 2022, optimism was bountiful across the continent. A survey of retailers by CBRE found that almost three-quarters of the region’s retailers expected moderate-strong sales growth and two-thirds wanted to open new stores. Looking back, many would have been reasonably satisfied with the sales growth, but, as always, there were things that came out of left field: a rapid escalation of interest rates (which are not coming down anytime soon), a major military upheaval in Ukraine accompanied by an energy shock, rolling lockdowns in mainland China and, now, the widely anticipated prospect of recession taking hold in 2023.

On the positive side, Covid restrictions eased and more people shopped in stores for a change, which was a huge fillip to food and beverage retail. It was this segment that led the charge in terms of signing new leases in 2022, and this trend is likely to be sustained in 2023. But while that’s a positive for landlords and will buoy occupancy, it can’t disguise the fact that retailers in staple discretionary categories like apparel and home goods are being a lot more cautious when it comes to real-estate deals.

Who benefits and who doesn’t?

When retailers are at their most cautious with regards to expansion, they usually focus on snaring prime locations at a discount. This means shopping malls and strips in secondary locations will be getting crumbs. That might not be such good news for shopping-centre companies with large portfolios in second-tier locations, such as Central Retail in Thailand and Vincom in Vietnam. Vincom, for example, has two formats, Vincom+ and Vincom Plaza, that operate primarily outside the main cities of Hanoi and Ho Chi Minh City, and sport occupancy rates of 72.4 per cent and 79.5 per cent, respectively. By the standards of the global shopping-centre industry, those are not high numbers and they will not be helped by an environment where retailers are worried about over-committing in a shaky global economy. 

Rents stabilising

With the notable exception of mainland China, the reopening of countries in 2022 more than offset the negative factors. The normalisation of tourism in markets such as Singapore and Bangkok also helped landlords lease space and stabilise rents. The current tourism high season has been strong but still not up to pre-pandemic levels, because of the elevated cost of air travel and the absence of tourists from China, who have found it extremely difficult or impossible to plan overseas holidays.

In China itself, rents in the main cities are still on a downward trajectory. Shanghai and other major mainland China cities are still likely to continue experiencing declining rents and increasing vacancy, followed by a slow recovery in the second half of 2023. The vacancy situation will be further pressured by new shopping-centre space opening.

Hong Kong can also be expected to suffer a decline in rents but at a slower rate as market sentiment improves due to a modest pick-up in overseas visitors. It will take time for the revival in sales to filter through to rent and occupancy levels but this should occur as 2023 goes on, with the usual caveat that a widespread recession could scupper everything. As elsewhere, much of the recent new leasing in Hong Kong has been in food and beverage, with relatively little activity in the traditional mall mainstays of clothing and accessories.

In Seoul, although rents are increasing slightly, demand for space is still muted, again reflecting retailer caution that is likely to carry through into next year. Retail sales are still sluggish overall, with the notable exception of department stores, suggesting that headwinds are strengthening and rental growth and occupancy are set to remain less than buoyant.

In Tokyo, too, rents are stabilising and even increasing in prime areas of the city. Japan’s Ministry of Economy, Trade and Industry states that retail sales at department stores and supermarkets have generally been on an upswing, rising by percentages in the low-to-mid single digits during the second half of 2022. However, the growth tends to be narrow, focused in personal accessories (particularly luxury items), and food and eateries. Clothing and household goods remain problematic. Declining floor area and staffing levels have helped raise productivity, both per square metre and per employee.

Outlook for 2023

On the whole, the outlook for landlords across the continent isn’t spectacular and is subject to an unusual amount of uncertainty. But with consumers going out again and tourists arriving, there’s hope. Certainly in the major shopping areas and malls of the large cities outside China, the worst seems to be in the past. Now, though, the pace of recovery is going to be more like the tortoise and less like the hare.


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