Q-Series Redux - What will the Great Mall of China look like in five years?

In our Q-Series report: Great Mall of China, we challenged the conventional wisdom that China's shopping malls will struggle over the next decade due to lower retail space per capita, under-consumption and a lack of quality mall operators. We remain positive on the shopping mall theme, and make five predictions for the next five years:

1. more luxury malls are likely to be needed (double 2020's number),
2. a new US$2.8trn transitoriented development (TOD) market, which is ESG positive, is emerging,
3. the winner takes all due to the asset-light model,
4. the business model is likely to transform from asset manager to investment manager, and
5. membership data should further differentiate malls' competitive advantages. 

In our Q-Series report, we highlighted malls' polarisation towards dominance (ie, luxury focused), convenience and REIT development. On luxury malls, we leverage our European luxury-goods team's insight on luxury brands' strategy in mainland China. On convenience, the new urbanisation policy under 14th Five-Year Plan (FYP) is supportive towards the TOD model as it preserves land usage. We estimate that this could be the next US$2.8trn market for developers. On REIT development, while it may not be applicable near term, we believe the asset-light model allows mall operators to quickly expand without balance sheet constraints, strengthening their bargaining power and membership-data advantages. This explains why the winners could take all.

UBS Evidence Lab's data on 1,200-plus malls and 3,400-plus brand stores suggests:

1. more luxury malls are needed in mainland China due to luxury brands' underpenetration in tier-2 cities,
2. Hong Kong developers have 'location advantage' due to better access to metro stations.

We partner with our Infrastructure team to quantify the TOD market size and the implications for railway contractors.