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GOLD FEVER

BEIJING’S RENTS SKYROCKET AS DEVELOPERS AND RETAILERS PREPARE FOR THE OLYMPICS

By Curt Hazlett

Beijing’s frenetic Sanlitun nightlife district, a longtime magnet for foreign visitors and expatriates, was crowded even before the city began to ramp up for the 2008 Summer Olympics. Now, as the games approach, Sanlitun is pulsing with the pre—event construction of hotels, expensive apartment buildings, trendy restaurants — and three malls within sight of one another.

Sanlitun is but one example of Beijing’s surging retail scene. Fourteen large malls are under construction around the city, notes Chris Pelyk, Cushman & Wakefield’s associate director of retail in Beijing.

Retail development has been a competitive sport in Beijing for the past decade, a period during which the capital city’s economy surged and its residents developed a taste for Western shopping centers, hypermar— kets and luxury brands. Even without the Olympics, the city would doubtless be experiencing a boom. But the prospect of the city being swollen by some 500,000 foreign visitors and 1 million Chinese from outside Beijing, has created an even stronger case for retailers and developers to be there.

Two of Japan’s largest department stores, Isetan and Aeon, plan to open large stores in Beijing in time for the opening games, and the Taiwan chain Shin Kong opened a Beijing store this spring.

In August, athletic—goods retailer Nike opened a 13,000—square—foot flagship about a mile northeast of Tiananmen Square. With Nike apparel already available in about 3,000 stores across China, the Oregon—based company said it believes the large new Beijing presence will give it even more status. “As we head toward the Olympics, we’re extending our brand leadership, deepening our consumer relationships and building what we expect soon to be a $1 billion business” in China, Nike Brand President Charles Denson said at the opening.

The games will also unleash a flood of franchised stores selling Olympics—branded goods, many of them near Beijing’s hotels and Olympic venues. Organizers say they expect 10,000 Olympics stores of various types to be open throughout the country in time for opening ceremonies on Aug. 8, 2008.

But it’s the growing number of malls that have gotten most of the attention. Cushman & Wakefield says the 14 malls now being built — all of them larger than a million square feet — will start opening by the end of this year and continue into 2008, although delays of four to six months will push some launches past the Olympics.

“There is a major rush on to get the malls completed before then so they can get free exposure. There will be a lot of foreigners around, and that will contribute to increased retail,” Pelyk said.

Much of the new construction is taking place in the city’s central business district. Among the new malls is The Place, a recently opened 750,000—square—foot center that features Spanish retailer Zara’s first Beijing store. (Another Zara store will open by the end of the year in Solana, billed as Beijing’s first lifestyle center.)

According to Colliers International, seven other new centers totaling some 5 million square feet will have opened in the central business district by the end of this year.

In a report last year on Beijing’s retail property market, Colliers noted that government restrictions on the residential market have driven investors to retail, especially in the CBD and in the Zhongguancun and Wangjing areas of the city.

And the new retail has opened into a strong market. According to city officials, Beijing’s retail sales through May of this year totaled $19.6 billion, up 14.9 percent from a year earlier. Supporting that growth has been a long—term improvement in the city’s economy, which the Chinese Central Bank expects to grow 9.8 percent this year.

One measure of how much buzz Beijing has these days is a surge of interest from restaurant chains, Pelyk said. “We have calls on a weekly basis from restaurants that are established in the States or in Europe and are now considering moving to Beijing and opening a store,” he said. “There have been restaurants from Los Angeles and Russia. In fact, in the past few months I’ve dealt with four or five Russian companies, which is more than I’ve seen.”

In some cases, the prospective tenants are shocked by the prices being asked for the best Beijing addresses, Pelyk said. “People see the retail sales potential here, and then I tell them the rents — sometimes $150 to $200 U.S. dollars per square meter in prime locations. They don’t expect that. They expect something like $50.”

Amid the growth, however, there are worries. In August, the Beijing Morning Post reported that “industry experts” are concerned that the surge in new shopping center construction may eventually depress the market; it noted that city planners expect a total of 30 malls and large department stores to open in 2008, most of them larger than 800,000 square feet. The growth “rings a warning bell” for retail development, said the newspaper.

That belief was echoed by Wang Yao, the deputy secretary general of the China Industrial Association, who told a retail forum in Shanghai that mall development throughout China is overheating. “China has too many shopping malls at the development phase,” he said in remarks published in August. “There will be more and more dead malls if no efforts are made to improve management.”

Already, individual retailers are struggling to get by, according to a report in May by McKinsey & Co. Its author, Richard Cheung, noted that too many Chinese retailers fail to understand how consumers shop and as a result fail to cater to them. Even with soaring sales, China’s retailers earn profits of only about 1 percent compared with 3 to 5 percent in other countries, the report said.

In Beijing these days, “the landlords have the upper hand because there is still a shortage of space,” said Cushman & Wakefield’s Pelyk. “You have some landlords asking unbelievable rents right now.”

He added: “This will probably change by the time the Olympics roll around. Most of the developers we deal with right now want to go upscale. They want Coach, they want Prada, they want Gucci. That’s unrealistic, since these tenants can open in every mall. After the Olympics they will move more midscale and maybe even further down if they can’t fill up their malls.”