In China, online retail spells death for malls

China's booming online market is forcing some brick-and-mortar retailers to close while pushing up vacancy rates in malls across the country.

With demand failing to soak up supply, the values of malls have come under pressure and so will the commercial mortgage-backed securities they are linked to, said Moody's Investors Service in a report yesterday.

It described such securities as "credit negative" as it is more difficult for mall owners to refinance their loans when their shopping centres do not generate as much cash as they used to.

"The rise in online sales has directly affected businesses in shopping malls," wrote Moody's associate managing director Marie Lam.

THREAT TO DEPARTMENT STORES

An increasing number of consumers will buy clothes online, after first trying them in a department store, because the store may not carry a customer's desired size or colour.

MS MARIE LAM, Moody's associate managing director

She cited electronic appliance shops and department stores as two prime examples: "Many consumers buy appliances online, preferring the wider choices offered in brands, models and prices. As for department stores, an increasing number of consumers will buy clothes online, after first trying them in a department store, because the store may not carry a customer's desired size or colour."

For this reason, some malls have lost their anchor tenants, causing foot traffic to fall. This could induce more tenants to give up their leases on expiry, pushing vacancy rates up further, said Ms Lam.

There is also a mismatch between the huge supply of retail space in China and the steady rise of online sales as a proportion of total retail sales in the country over the past few years.

A CBRE global survey of 171 cities found that 39 million sq m of retail space was under construction as at the end of last year. About 65 per cent of that is due for completion in China.

China also accounted for half of the retail space from shopping centres completed worldwide last year .

But Ms Lam expects the negative impact on China's malls to be moderate.

"Consumption levels in China demonstrate large room for growth. Moreover, the Chinese government's urbanisation target should provide support to consumption growth levels," she said.

A version of this article appeared in the print edition of The Straits Times on September 18, 2015, with the headline 'In China, online retail spells death for malls'. Print Edition | Subscribe