MARKET OVERVIEW

A surge in COVID cases and subsequent lockdown in March had an outsized effect on the retail market, with Shanghai’s retail sales falling 10.7% YoY in the first three quarters of 2022, with wholesale and retail sales down 9.4% YoY, and accommodation and F&B sales down 24.8% YoY After the lockdown was eased in June, consumption began to recover with consumer spending skewed towards food, though there was also a pickup in some discretionary expenditure in Q3/2022, such as NEVs (New Energy Vehicles), smartphones, jewellery and cosmetics growing by 39.8%, 6.6%, 4.9% and 1.3%, respectively. Demand for NEVs is driven by policy support, highly competitive offers in a fiercely contested space, as well as an increasingly environmentally conscious consumer base. International cosmetic brands have been snapping up a stable of niche brands and bringing them to the China market, while they are initially marketed online; pop-up stores and offline store networks will often follow, with Shanghai typically the first choice.

The forced closure of nearly all retail premises for two months or longer posed a huge challenge to tenants, especially those with perishable items, high labour costs, limited cash reserves, concentrated local exposure and an inability to transition to online platforms. It is no surprise therefore that the F&B sector accounted for 44% of space vacated in Q3/2022 with tenants facing significant cash flow strain while restrictions on in-store dining continued even after the lockdown ended. Other affected sectors include fashion and children-related venues, especially in-person education centres which were already reeling from the double reduction campaign which started last year. Community and one-stop shopping malls were particularly affected by some of these early terminations.