E-commerce presents property market opportunities
Print Edition
The rapid emergence of e-commerce has captured the attention of the world with China, in particular, gathering the strongest momentum as its Internet-connected population is increasingly shopping online.
As Boston Consulting Group estimated, in 2011 alone, 61 million Chinese went online for the first time, and 43 million made their first online purchase. By 2020, China’s online market will exceed US$1 trillion, dwarfing all competitors.
As China’s e-commerce market continues to grow and evolve, two sectors of the real estate industry are seeing contrasting effects. On the retail side, property developers and operators as well as retail brands are fearful that online sales growth may come at the expense of in-store purchases. On the other hand, developers of logistics property have seen demand for warehouses skyrocket from e-commerce firms seeking distribution space.
In a recently released white paper, Jones Lang LaSalle, a global real estate services provider, has examined what major challenges and opportunities the rise of e-commerce in China will present to the country’s retail and logistics property sectors.
There are risks for some segments of the market, particularly at the low-end of the mass market, but nearly everyone in the retail sector can evolve the way they interact with their customers in order to succeed. Meanwhile, the e-commerce market’s structural reorientation towards business-to-consumer platforms makes the logistics sector the most attractive real estate opportunity in China, according to Michael Klibaner, head of research for Jones Lang LaSalle’s China operation.
In developed markets, the rise of e-commerce has proven a destabilizing force for many segments of bricks-and-mortar retail. In China, much of the pessimism currently being expressed regarding the cannibalization of offline sales by e-commerce and the future of retail real estate is overstated, though there are real risks for some segments of the market.
“We believe that these concerns both overemphasize the threat posed by e-commerce and underestimate the resilience of many types of physical retail,” said Eugene Tang, head of retail for Jones Lang LaSalle China. “Physical retail will not wither away in the face of easy online shopping, but some formats are more vulnerable than others.”
One segment of the market at risk to disruption is low-end mass market apparel, which tends to be highly fragmented and unbranded. Crucially, these goods are basically identical to the items that dominate the small stores that comprise China’s no-frills, mass market shopping centers. This brewing competition means the archetypical strata-titled shopping mall could be the first to see a substantial portion of its tenant base become obsolete.
Asset managers of wholly owned retail properties, on the other hand, can take a top-down approach and adopt strategies to stay relevant. Taking themes, positioning, marketing and promotion, tenant mix and technology into account, shopping mall operators can create an environment giving consumers experiences that cannot be achieved online. Going shopping will continue to be an important social experience in China, the white paper has concluded.
In contrast to the retail sector, e-commerce has been indisputably beneficial for China’s logistics property sector.
“Developers of logistics property should be aware of on-going structural changes in the online sector that promise to create more opportunities in years to come,” said Stuart Ross, head of industrial for Jones Lang LaSalle China. “Crucial among these is the rise of B2C sites.”
One notable trend in e-commerce distribution is that some of the biggest B2C platform sites are exploring options to build their own logistics networks with self-owned and operated warehouses. Here developers of logistics property will have opportunities to form partnerships with firms to share their expertise, Stuart said.
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