Mainland shopping malls are shrugging off the impact of e-commerce and recovering strongly on the back of healthy retail sales, a brokerage company says.

Shopping malls hit head winds in 2014 and 2015 as brick-and-mortar stores took a hit from the e-commerce boom and luxury-item sales declined.

Figures from DBS Vickers, the securities arm of Singapore-based multinational bank DBS, show that retail sales at the top 50 mainland retailers dropped by 7 percent year-on-year as of August 2014.

But experienced mall landlords have worked out ways to mitigate the impact, the broker says, even though online retail will continue to sustain a double-digit compound annual growth rate.

"Years ago, fashion apparel comprised 70 to 80 percent of the tenants in a shopping mall. The percentage has been lowered to 50 percent. ... Shopping malls are shifting to experiential consumption and more service providers, such as tutorial schools and beauty salons, are moving in," says Carol Wu, executive director and head of research for DBS Vickers.

The brokerage company says the number of malls in China's top 30 cities will grow from the current 998 to 1,445 by 2019, but Wu says market concerns that the mainland has too many shopping malls are unfounded.

"Thirty to 50 percent of the new malls will be delayed or canceled due to construction delays and leasing difficulties. If a mall can't secure enough tenants, it won't open in the end. Policy is also encouraging the conversion of retail malls to office space," Wu says.

Mall penetration on the mainland remains low, DBS says. Based on urban population, the penetration rate is less than 60 percent.

Growing buying power, especially in first-tier cities, strongly supports retail recovery. Disposable income per capita in first-tier cities reached more than 50,000 yuan ($7,490; 6,380 euros; ￡5,690) last year, representing 8.8 percent more than the previous year. Recovery at retail malls is mainly driven by strong buying power in first-tier cities, Wu says.

To cash in on rising consumption demand in first-tier cities, dozens of foreign luxury brands have narrowed price gaps to prompt domestic buying on the mainland.

Chanel, for example, narrowed the price gap between luxuries sold on the mainland and in the United States to 15 percent.

Four types of shopping mall will be top performers in the recovery, DBS predicts: existing luxury malls in first-tier cities; mass shopping malls in suburban areas of first-tier cities, which will benefit from rising populations because of decentralization; quality malls with first-mover advantage in lower-tier cities; and those with good management.

The broker is betting on mainland shopping malls over their Hong Kong peers, saying landlords from mainland malls collect lower fixed rent but turnover rent, buoyed by strong sales of its retail tenants, will boost income. In Hong Kong, the rental structure relies heavily on fixed rent. DBS estimates that landlords of major mainland shopping malls will have a 10 percent growth in rent this year.

DBS is bullish on leading players in mainland shopping malls, including China Resources, Longfor and Initiate Joy City. The brokerage has just upgraded Lang Lung Property to "buy".

More real estate developers are moving into the shopping mall business, Wu says. Country Garden, for instance, a leading residential property developer based in Guangdong, is poised to expand into shopping malls.

"Properties sold to homeowners are more profitable, but this is highly cyclical. More developers will want stable cash flow from shopping malls to hedge the risks," Wu says.

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(China Daily European Weekly 10/06/2017 page28)