These two examples are, in fact, the same structure: the New South China Mall in Dongguan, Guangdong province. With more than 600,000 square meters of retail space, the mall boasts a rollercoaster, a Venetian canal and a replica of the Arc de Triomphe. But since opening in 2005, the mega project has signed up few merchants and remains 99% vacant.
Despite the fact that shopping is one of the country’s favorite pastimes, the New South China Mall is not alone. One doesn’t have to do much more than walk through one of China’s many ghost malls to see the problems that retail properties face: empty wings, a maze of disjointed escalators, bored shopkeepers and a noticeable lack of shoppers.
The problem, according to some in the commercial property industry, is that many Chinese malls are managed by the developers who built them – and these companies tend to have minimal experience in providing building maintenance, as well as attracting and managing retail tenants.
“If a developer doesn’t have retail experience, the design and leasing control may not be ideal,” said Annie Lei, senior director of retail services at CB Richard Ellis in China. “Many developers are thinking that retail will be [more profitable] than residential. But this isn’t true because right now, there are too many malls in certain sub-markets.”
According to Paul Hart, executive director of real estate agency Knight Frank in Hong Kong, one problem in first-tier cities is that multiple shopping malls are often built on a single block. In such highly-competitive markets, Hart stresses that retail centers have to be strategically positioned and display a deep understanding of the local consumer market.
“[Many developers] still subscribe to the theory of, ‘Build it and they will come,'” Hart said. “This couldn’t be further from the truth in retail.”
Successful retail positioning relies on research into the local consumer market, and securing anchor tenants – such as grocery stores – that will stir interest among potential customers even before breaking ground. And after the doors swing open, retail property managers must be proactive in asset management, maintaining an optimal mix of tenants and tracking retailers’ performances.
“Maybe when a shopping center was first built, they were the only one around, but now they have competition,” said Benjamin Blatteis, senior manager for retail services at CB Richard Ellis. “The tenant mix and original positioning might not be ideal [given the current conditions]. CBRE offers retail services to improve the positioning and tenant mix to closer align with market demand.”
Still, some malls face problems that aren’t as easy to fix. In the past, it was common practice for Chinese developers to sell off individual portions of their malls to finance projects. While this “strata-titling” was an effective tool for raising capital, it made retail management much more difficult, as multiple owners with different visions would have to reach an agreement on every decision.
Struggling malls are also often plagued with design flaws. Poorly placed entrances and exits can hamper pedestrian flow, while inefficient escalator and elevator logistics create challenges for retailers on upper levels.
Some retail projects, however, are making profits after taking time to work out kinks. Stephen Ip, KPMG’s property management partner for eastern and western China, said that malls usually experience a few years of losses before reaping profits.
“If they do fail, it’s because [the management] does not have the financial strength to keep losses going until the project reaches maturity,” he said.
One such example is Shanghai’s Super Brand Mall, owned by a Chinese subsidiary of Thailand’s Charoen Pokphand Group. When the mall opened in 2005 in Lujiazui financial district, the area was undergoing a flurry of construction and development – a major deterrent for shoppers. And while the 13-floor property struggled at first, visitor traffic started to pick up as nearby commercial and residential buildings were finished and occupants began settling in.
Today, Super Brand Mall’s average daily traffic reaches about 180,000 people, with weekend traffic as high as 300,000. Lei of CB Richard Ellis said the mall’s success is due to its skilled management. “When [Super Brand Mall] opened, it was too big,” Lei said. “But the owner had the vision and financial support.”
For long-term success, George Agethen, head of capital raising and business development at Harvest Capital Partners, argues that China’s retail property sector cannot simply rely on foreign consultants. Developers have to learn to properly manage their retail investments themselves.
“[Consulting firms] get paid to perform a certain function,” Agethen said. “An owner of real estate is always looking to make that extra effort. They’re dedicated to making sure that their investments work well.”