The shopping habits of Chinese consumers are developing rapidly, and LifeHub@Kunshan is one of a new generation of retail-led mixed-use projects designed to meet their changing demands.
The stereotypical image of a Chinese shopping center is that of a huge shiny box, filled with luxury brands for trophy-hungry customers. However, slowing retail spending growth and a glut of luxury malls mean that this strategy does not work as well as it used to. Beijing’s crackdown on bribery and corruption also has hindered sales of luxury goods.
The supply of retail space is abundant: CBRE research shows that 11 of the 12 global cities with the most retail space under construction are in China. The top five cities—Chongqing, Shenzhen, Chengdu, Shanghai, and Wuhan—have more than 16 million square meters (170 million sq ft) of retail uses under construction.
However, the most dramatic change for retail landlords has been the growth of e-commerce. The Chinese have taken to online shopping, in particular mobile shopping, with a vengeance, and this has hit malls hard. China’s online retail market is the world’s largest, nearly 80 percent bigger than that of the United States, according to McKinsey & Company. E-commerce in China accounted for 15.5 percent of all retail spending in 2016, a total of $749 billion, according to China’s National Bureau of Statistics. Payment services company Worldpay predicts that this will almost double to $1.42 trillion by 2020.
These factors combine to make competition for shoppers harder than it has ever been in China. Henry Cheng, chief executive of Chongbang Group, developer of LifeHub@Kunshan and chairman of ULI Mainland China, reflects on how times have changed.
When Chongbang was launched in 2003, retail-led development was the least crowded part of the Chinese real estate market, with Shui On Land’s Xintiandi development being the only major retail scheme in Shanghai—back then, most retail space was in department stores. Most developers were focused on residential. “We had to do something different in order to compete with local developers,” Cheng says.
Cheng hails from Hong Kong and his core team came with him from Hong Kong–based China developer Shui On Group and had worked together for many years. Also in at the beginning with Chongbang was a group of experienced professionals from Kerry Group, another major Hong Kong developer. These included Cheng’s wife, Fanny, who worked for Kerry for 25 years before joining Chongbang and who has driven the increasingly important nonretail elements of the Kunshan mall.
“From when I first came to Mainland China in 1993 to now, the change has been remarkable,” Cheng says. “I would divide [those] 23 years into three eras. From 1993 to the end of the 1990s, that was the era of quantity: you had to be big and move fast. From the early 2000s to 2010 was the era of quality, when retail landlords needed quality assets. Since then, we have moved into the era of difference.
“Quantity is definitely not a competitive advantage; quality is much less of a competitive advantage since most developers are building to a high quality, but you have to be different to be competitive.
“We try to do something new for each of our projects, and if you look at them you will see that every one is different. I would say that every one was the first of its kind when completed—and some remain unique even long after completion.”
In short, Chongbang had to be different to survive in its early days, and now that differentiation is helping it to thrive.
LifeHub@Kunshan is an 800,000-square-meter (8.6 million sq ft) retail, residential, and office development by Chongbang Group, located an hour’s drive from Shanghai, in a prosperous satellite city. Kunshan, which is actually administered by nearby Suzhou but forms a satellite city to Shanghai, has developed as a hub for Taiwanese manufacturing. The city was once home to iPhone manufacturer Foxconn, which has subsequently moved its manufacturing operations to western China, while maintaining management and research and development functions in Kunshan.
Cheng notes that the city’s population has almost doubled to 2.7 million in the three years since his company bought its development site there. “Kunshan will definitely be a city of 5 million people in ten years,” he says.
Shanghai has huge potential to grow as an employment center, but it is limited in how much its core districts can expand. Satellite cities such as Kunshan offer it the capacity to grow further. It has good road access and is linked to Shanghai by conventional and high-speed rail. High-speed trains run between Shanghai’s Hongqiao station and Kunshan every ten minutes and the journey takes only 17 minutes—short enough to make Kunshan a cheaper hometown for Shanghai workers.
However, while Chongbang sites its developments near public transport hubs, Cheng notes that “our highest-spending customers are people who drive,” so parking remains an important part of the shopping mall. Shoppers who arrive by metro tend to be younger with lower spending power and are the least loyal, he says.
The retail element of LifeHub@Kunshan features mainly midmarket brands, about half of which are Chinese. When one is visiting on a midweek morning, the shops are fairly quiet as might be expected, but the mall’s plentiful seating is being used by mothers, toddlers, and babies. Between events, an indoor amphitheater doubles as additional seating for shoppers.
Many retail developers look to ameliorate the effect of e-commerce, but Cheng takes a different view: “From the time e-commerce took off and its share of the retail market increased, we have regarded it as a partner rather than a competitor,” says Cheng. “The future is online plus offline.”
“About three years ago, we started our ‘O+O’ plus and began to identify online retailers who shared our business philosophy. We worked with them to devise a strategy to bring them offline. Alibaba’s first online shop was in a Chongbang development.”
The Kunshan mall features a section, dubbed Hub Novo, where the shops are all operated by online brands. In common with the three other LifeHubs—the first of which, LifeHub@Daning, was completed in 2006—it also has a fulfillment center where shoppers can arrange to have online purchases delivered to lockers of varying sizes. In addition, the facility has changing rooms so that shoppers can pick up items, try them on, and, if necessary, put them back in the locker for collection, making returns easy. This has turned out to be a very popular facility, Cheng says.
In Kunshan, Chongbang is a retailer as well as the landlord; in the center of the mall is an area where items—ranging from leather goods and pottery to furniture and art—made in the surrounding area are presented for sale. The facility offers a sales opportunity for local craftspeople—an income stream for Chongbang—and anchors the mall in its local context and community.
The mall has a busy events program, with paid-for performances enhancing the landlord’s income while driving traffic to the shops. The children’s theater has hosted performers from the United Kingdom, Canada, and Australia. In total, the mall will host 500 events a year. Cheng stresses that these are an important part of the development’s income as well as a way to attract shoppers; the development’s events space is required to make as much money as the retail space.
Facilities for children are an important part of the overall development, since the residential component is aimed at young professionals. The mall has a reading room well stocked with children’s books in multiple languages and a games arcade with a wide range of machines on offer.
The clubhouse at the residential development has a playroom for children, complete with an indoor mini–race track. Outside lies a play area. Adults also are well catered to: the clubhouse has a gym with high-end equipment and a good-sized lap pool. The gardens surrounding the development feature a running track with a yielding surface so that joggers need not pound their joints on tarmac.
Chongbang is entirely vertically integrated, with only property management outsourced, and Cheng designed the grounds of the residential development himself, with plantings designed to provide color for most of the year.
Similar care has been taken with the mall, which has plantings native to the surrounding area, including small plantings of rice and tea, which are harvested, although in quantities suitable only for marketing. Nonetheless, the landscaping roots the LifeHub in its surroundings.
Cheng says that the residential element of the Kunshan development is something he always shows foreign visitors, so they can see “how young, middle-class professionals in China live.” A look around the development seems to indicate that they live pretty well: the apartments are well designed with high-quality finishes. They are also reasonably spacious—measuring approximately 74 square meters (800 sq ft) for a two-bedroom apartment—with plenty of natural light.
Comparing his project with developments in his native Hong Kong, Cheng points out that China’s tough building regulations force developers to build better than their counterparts in Hong Kong. The abundance of natural light, for example, is a result of regulations that prevent developers from squashing residential towers together.
Chongbang continues to try to be different in its residential developments, however; unlike most developers in China, it supplies apartments fully fitted with bathrooms and kitchens. Most other apartments are sold as bare shells, with developers keen to deliver units and recycle capital as soon as possible.
However, selling apartments in turnkey condition adds margin for the developer and means that occupiers are not plagued by the noise of fit-out as the development is gradually occupied.
The office element of the development has been partially strata-sold (i.e., the office units are sold to individual occupiers or investors) and partially retained by Chongbang. The developer offers a high level of service and shared space for office tenants.
While Cheng might be considered a particularly philosophical developer, other companies have learned the same lessons about the importance of placemaking in retail development.
Stephen Chow, a director in the Hong Kong office of architect Benoy, says: “To be successful, retail developments in China need to take account of setting, culture, and people. The best developers are building bespoke malls.”
Chow notes that the tenant mix is increasingly in focus, particularly the combination of retail, food and beverage (F&B), and leisure uses. “You can’t just fill the mall with Louis Vuitton,” he says. Most new shopping centers have a much higher proportion of F&B than was typical a few years ago.
Chow cites New World Development as another developer looking to innovate in China, with its K11 “art mall” concept. Vice chairman Adrian Cheng has previously spoken about building “a mall that is not a mall” and the importance of experiential retailing. State-owned China Resources Land also has been developing malls designed to reflect the landscape and culture of the cities in which they are located.
Looking forward, Chow says that shopping centers will need more flexible space to take account of changing shopping habits. Cheng says that Chongbang reviews operations at its malls every six months to see what might be changed or improved. The short tenancies typical of Chinese markets make it easier for developers to react to changing trends.
In the longer term, Cheng believes that the older shopper will be increasingly important as the first generation of Chinese to become wealthy since Deng Xiaoping opened the country to global markets approaches retirement. This growing retiree market is one that future Chongbang malls will be designed to serve.
China’s modern retail market—if the launch of the aforementioned Xintiandi in 2000 could be said to have been the start of it—is still only a teenager, Cheng notes. It is remarkable that a market that started well behind that in the United States and Europe is now ahead of it in some ways, such as the integration with online shopping.
Shopping centers elsewhere have had to find ways to deal with the challenge of e-commerce. For example, since shoppers are still keen on seeing groceries before they buy them, Blackstone has been expanding the food-store areas of its shopping malls in Australia.
Benoy’s Chow believes that malls elsewhere in the world will have to plant deeper roots in their communities, which might mean less reliance on national brands. Since the global financial crisis, spending on eating out has held up in developed retail markets, so the space taken by F&B is increasing outside of China, too.
The rise of online shopping will continue to change how malls are occupied. A few fashion retailers now stock only one item in each size in their stores, so that customers can try clothes on; the transaction, however, occurs online. In Singapore, the Marina Bay Link Mall has a unit leased to Singapore Post, the city-state’s designated public postal licensee, which plays a function similar to that played by Chongbang’s e-commerce fulfillment centers.
Chongbang’s thoughtful approach to the China market has won the developer the approval of some high-profile global investors, including Singapore’s GIC, the sovereign wealth fund, and more recently Ivanhoé Cambridge and Dutch pensions group APG, which invested $920 million in the company.
Cheng acknowledges the pressure of his expanded balance sheet but also says he believes that the role of the retail landlord in China will become ever more specialized, benefiting firms such as Chongbang, which may be able to acquire underperforming assets from nonspecialist developers seeking to exit the sector.
He says: “If you look back ten years, the question was: Who is doing retail in China? Five years ago, you asked instead: Who is not doing retail in China? In five years’ time, we will be asking: Who is still doing retail in China?”