Tough times take hold at commercial projects

Updated 2017-08-24 09:33:25 Global Times

Developers grapple with glut of shopping malls, hotels

Beijing-based commercial property developer SOHO China is promoting its shared office projects around the country to make the most of existing properties, Chairman Pan Shiyi has said.

Pan made the remarks on Tuesday in a conference in Hong Kong to release SOHO China's interim results, news site reported.

SOHO's net profit in the first half was about 3.98 billion yuan, up from roughly 600 million yuan in the same period in 2016.

"Too many properties have been built in China during recent years, and ... commercial properties such as shopping malls have been overdeveloped," said Pan. He said that he had visited five cities where many shopping malls are facing difficulties in operation.

The domestic commercial property sector faces "large inventories and patchy sales," and fewer new projects are being developed as demand falls, Hui Jianqiang, research director with real estate information provider Beijing Zhongfangyanxie Technology Service, told the Global Times.

The traditional shopping mall is "under siege" from e-commerce, and the plight of "ghost malls" is glaringly evident in third- and fourth-tier cities, Hui said.

From 2010 to 2016, shopping malls saw an annual increase of 16 percent in terms of covered area, according to a report by Beijing-based financial newspaper China Times in March.

"Under pressure from changing consumer preferences for good services and a total shopping experience, as well as competition from the online model, shopping malls need to transform and upgrade themselves to win back shoppers by combining shopping with entertainment," Hui noted.

The vacancy rates of community-level shopping malls in third- and fourth-tier cities remain high and their rental operations aren't performing well, noted Hui.

Hui said that despite the glut of commercial property, the longer-term outlook is brighter amid China's urbanization drive, which will gradually bring foot traffic to new downtown malls in growing cities.

Pan pointed to Dalian Wanda Group as an example of the hotel sector's woes. Pan noted that Wanda sold its hotels at low sale prices, indicating the return of hotels is very low.

In July, Wanda Commercial Properties agreed to sell 77 hotels to Guangzhou-based R&F Properties. It takes a long time for a hotel to show a profit, and even then the rate of return on investment is relatively low, Hui explained.

There's also a glut of hotels in China, noted Song Ding, an expert at the Shenzhen-based China Development Institute.

"The number of new hotels has been increasing so fast, but demand hasn't kept up," he said.

Developers like SOHO or Wanda can see that traditional commercial properties are facing more difficulties, experts noted.

SOHO has also said it is pursuing an "asset-light" strategy. In 2016, SOHO sold SOHO Century Plaza in Pudong district, Shanghai, with a gross rental return of only approximately 3.4 percent, the company said. It also sold its entire ownership interest in Hongkou SOHO in Hongkou district, Shanghai, with a gross rental return of about 3.7 percent.

Wanda Group will reportedly build a large tourism project in Northwest China's Gansu Province, its first venture in the sector after it signed deals in July to sell 13 cultural tourism projects.

The move has led some observers to question the sustainability of its "asset-light" strategy. Song said that Wanda is taking this path by cooperation with asset-rich partners such as Sunac China Holdings.

For its part, Wanda will provide advantages in branding and business operation.

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