Wal-Mart, Ikea Lead Retailers’ Push in China Land-Buying as Rentals Surge
Wal-Mart Stores Inc. (WMT) and Ikea Group are leading foreign retailers that are buying land in China to develop their stores, abandoning a decade-long strategy of leasing as rents climb.
Wal-Mart, the world’s largest retailer, bought sites in northeastern Dalian for the first time last year, while Inter Ikea Centre Group, the developer part-owned by Sweden’s Ikea, invested $1.2 billion to build 510,000 square meters (5.5 million square feet) of malls as the largest home-furnishings company expands in the world’s fastest-growing major economy.
Foreign retailers are buying properties as rents soar after a 4 trillion yuan ($619 billion) stimulus package in 2008 helped revive economic growth. Retail rents in Beijing’s downtown Wangfujing district almost doubled in the second quarter this year from 2007, while in Shanghai’s West Nanjing Road shopping strip they jumped more than 50 percent in the same period, according to Cushman & Wakefield Inc.
“It’s becoming more and more difficult for them to get extraordinary leasing terms because Chinese landlords are becoming more sophisticated,” said Michael Klibaner, head of China research at Jones Lang LaSalle Inc. in Shanghai, referring to leases from 10 years to 15 years. “The economics of doing retail development look very attractive now if you can get the land.”
Demand for retail space helped drive a 42 percent surge in commercial real estate investments in China last year, marking the start of an “era” for malls, according to Cushman & Wakefield, a New York-based real estate services firm.
Wal-Mart, which has 339 stores in more than 120 Chinese cities, may keep buying land in anticipation that more people in the nation of 1.3 billion will move into cities where it plans to open more outlets, said Ed Chan, chief executive officer of the company’s China operations. The Bentonville, Arkansas-based retailer will either purchase properties or tie up with a developer for new shopping centers, he said.
“When we open a store, we look at a very long term, many, many years,” said Beijing-based Chan. “Urbanization and the creation of the middle class will be still quite robust for the next 10, 20 years with additional cities being created.”
About 170 million people moved to cities in the last 10 years, the biggest urbanization in history, according to the Chinese Academy of Social Sciences. China aims to increase its proportion of those living in cities from 47.5 percent to 51.5 percent by 2015, it said in its latest five-year plan.
Owning more of the buildings its stores operate in is in line with Stockholm-based Ikea’s “global approach,” said Gillian Drakeford, the company’s China retail president. Ikea and its local partner own eight of its nine stores in China and lease the location in the southern city of Guangzhou. It plans to buy more properties for new outlets, Drakeford said.
“This allows Ikea to lead the process and to ensure that the right conditions are secured for the stores,” Shanghai- based Drakeford said. “Ikea’s approach to store establishment is long-term with substantial investment in existing and new markets.”
Tesco Plc (TSCO), the U.K’s biggest retailer, formed a second, $280 million joint venture in March to develop three shopping malls in China with HSBC’s Specialist Investments Ltd. and Metro Holdings Ltd. (METRO) The malls in the southeastern cities of Fuzhou and Xiamen, and Shenyang in the north, will generate 2.47 million square feet of space with Tesco hypermarkets as the anchor stores, according to an HSBC statement at the time.
Arriving in China
International retailers started arriving in China in the mid 1990s as the nation worked toward opening its economy to foreign investment in the lead up to its entry to the World Trade Organization in 2001. After China relaxed restrictions on foreign retailers in 2004 to meet WTO pledges, overseas retailers were allowed to wholly own stores in the country and restrictions on where they could operate stores were lifted.
Boulogne-Billancourt, France-based Carrefour SA opened China’s first supermarket in December 1995, while Wal-Mart and Dusseldorf-based Metro AG (MEO), Germany’s biggest retailer, arrived in 1996, according to their websites. Group Auchan SA of Croix, France arrived in 1999 and Cheshunt, England-based Tesco in 2004, according to the companies’ websites.
Carrefour, the world’s second-biggest retailer, bought “a few” sites in China while the majority of locations are leased, Liao Yan, the company’s spokeswoman in Beijing, said in an e- mailed statement, declining to give details.
The plan to develop and own retail space has so far been limited to the so-called big-box retailers, according to Colliers International. Those requiring less space, such as Apple Inc. (AAPL) and Gap Inc., will continue to rent, according to the Seattle-based property broker.
“The profit margin for hypermarkets, which require a large scale of land, is low, and they are rent-sensitive,” said Sherman Yeung, Beijing-based director of retail services at Colliers International North China.
China last year surpassed Japan as the world’s second- biggest economy, and is forecast by PricewaterhouseCoopers LLP to eclipse the U.S. by 2018. Urban household income per capita rose 13.7 percent in 2010 from 2009. The economy expanded 10.3 percent in 2010.
“China is now probably more important to the future of these companies than it’s ever been,” said Jones Lang’s Klibaner.
Some foreign retailers have pulled out amid growing competition. Richfield, Minnesota-based Best Buy Co., the world’s largest consumer electronics retailer, closed all its nine stores in China this year to focus on expanding a more profitable domestic chain it acquired five years ago.
Chinese supermarket chains have expanded through mergers and acquisitions amid competition as the country made it easier for foreign retailers to do business there. Wumart Stores Inc. (8277), Beijing’s largest supermarket chain, had 123 supermarkets and 390 minimarts by the end of March 31, according to its first- quarter financial statement, after taking over supermarkets from a rival and becoming controlling shareholder of another chain.
“More and more foreign hypermarkets are entering the market and the domestic companies are getting better,” said Klibaner. “That’s becoming more challenging and that’s one of the key reasons why they are pursuing development opportunities now more than in the past.”
China’s retail sales growth slowed to 16.9 percent in May, less than the average of the past five years. Borrowing costs have risen as the central bank raised interest rates four times since October and the government tightened monetary policy to contain inflation and a surge in home prices.
Developers also have become more reluctant to sign longer leases with hypermarket operators such as Wal-Mart and Tesco because they prefer smaller boutique and high-end stores that add to the branding of their properties, Colliers’s Yeung said.
Demand for retail space remains strong with new tenants negotiating for sites at its properties, according to CapitaLand Ltd. (CAPL), the Singapore-based developer with 38 shopping centers in China, of which 22 are anchored by Wal-Mart.
“There are so many other retailers we work with,” said Chief Operating Officer Lim Ming Yan in an interview on June 20. “In that sense, it doesn’t affect us. I’m not worried” about retailers building their own properties, he said.
Retailers expanding into second- and third-tier cities, which are less affluent than metropolitan areas including Beijing and Shanghai, may get government incentives to buy land to develop stores, said Richard Ding, chief executive officer of Royal China Group, a Shanghai-based investment and consulting company in retail and property.
“They may get some good conditions in smaller cities because the local governments love foreign brands to be there,” Ding said.
Foreign retailers may be getting an added gain from property investments because they are in the local currency, which is expected to appreciate to 2.5 percent to 6.3 against the U.S. dollar by the end of this year, according to data compiled by Bloomberg. The yuan has increased 26 percent since the government first scrapped its peg to the dollar in July 2005 amid pressure from its trading partners.
“Foreign retailers are also realizing that it makes sense economically to hold yuan-denominated assets in China, which allows them to enjoy extra capital gain from their investment,” Ding said.
--Bonnie Cao, Michael Wei. Editors: Linus Chua, Andreea Papuc