w279307 magnify asia retail · while key drivers for retail in developed asia pacific continue to...
TRANSCRIPT
For Investment Professionals only
May 2018
Magnify Asia Retail
• Preference for:
– super-regional shopping centres in Australia and Hong Kong
– high street retail in Tokyo and Seoul
– suburban shopping centres in Singapore
• Supportive macro fundamentals driving the APAC retail sector
• Physical retail underpinned by consumers' social, experiential, convenience and dining out needs
• Active asset management to boost value of assets – crucial in the new retail age
Executive summary
03
Our recommended real estate investment strategy for the key developed APAC markets is therefore:
Market
Preferred retail
asset type Rationale
Australia,
Hong Kong
Super-regional shopping
centres
• For exposure to increasingly affluent domestic consumers and tourists,
as such assets have attractive one-stop ‘destination’ appeal
• Sufficient scale to ensure a diverse tenant mix, to create an omni-channel
marketplace and to leverage technology for improved data collection
and analytics
• Typically on large land sites which are increasingly scarce in urbanised cities
Japan,
South Korea
High street retail and
shopping centres in prime
areas of key cities such as
Tokyo, Osaka, Fukuoka,
Seoul
• For exposure to wealthy domestic shoppers and expected increase
in tourism
• Sustained retailer demand from international brands for flagship stores
• Opportunity for land banking for redevelopment
Singapore Suburban shopping
centres
• For exposure to high density neighbourhoods where local consumers
shop more frequently at centres closer to home for convenience rather
than at prime centre locations
• Limited upcoming supply in the long term
We remain positive on retail in the developed Asia
Pacific (APAC) markets despite headwinds from
structural changes in the sector driven by the growth
of e-commerce and changing consumer shopping
behaviour. This optimism is backed by favourable macro
fundamentals, such as rising income and wealth levels,
and supportive trends, including the demand for retail
spaces to fulfil consumers’ social and experiential needs.
The prospects for retail in the key cities of five developed
APAC markets1 in the medium term are attractive for the
following reasons:
Supportive macro fundamentals• Stable population growth in key gateway cities
• Rising income and wealth levels
• Growing intra-regional tourism
(particularly from emerging markets)
Key drivers for physical retail in the region • Continued demand for retail to fulfil social
engagement needs
• More convenient shopping in urbanised
gateway cities
• Higher frequency of dining out among
APAC consumers
The positive macro backdrop and favourable conditions for
retail in the developed APAC markets should boost retailers’
business sentiment and demand for space. Physical retail in
dense well-connected cities will continue to appeal to both
domestic and international retailers seeking exposure to
affluent consumers and tourists.
While key drivers for retail in developed Asia Pacific
continue to be attractive, active asset management has
become even more crucial to property performance in
this new retail age. An era where physical and online
retail channels are increasingly blended together to
offer the consumer a seamless shopping experience
creates new challenges, but also opportunities. The
adoption of omni-channel retailing is a growing trend,
alongside technological integration, targeted marketing
and place-making strategies, which are used to attract,
engage, and retain consumers and tenants.
1 The five developed markets in this report refers to Australia, Hong Kong,
Japan, Singapore and South Korea
Introduction
04
2 Oxford Economics ‘Global Cities 2030’, December 2017. 3 Oxford Economics ‘Global Cities 2030’, December 2017. 2012 prices and
exchange rates non-PPP.
Rising income levelsWith significant volumes of outbound tourists,
Chinese consumers are important to the APAC retail
sector. China is predicted to have around 45 million
urban households in 2030 with annual incomes in
excess of $70,000, ahead of Europe and just behind
North America.
The capital cities of the five developed APAC markets are
expected to record sustained income growth as global
economic power continues to shift eastwards. Tokyo,
Osaka and Seoul are expected to become some of the
largest global consumer cities in 2030 with the number
of middle-income households reaching 7.7 million,
4.6 million, and 2.3 million, respectively.3 This underscores
expectations for household wealth growth over the next
decade (Figure 2), providing higher levels of disposable
income for consumers to spend on goods and services
in their home country or neighbouring countries. Rising
affluence also provides support for higher value
discretionary purchases too.
Positive macro fundamentals underpin a healthy consumer market
Stable population growthKey gateway cities, such as Tokyo, Hong Kong, Singapore
and Sydney, are expected to continue to record steady
population growth (Figure 1). Tokyo is forecasted to take
second position in terms of population growth by 2030,
and come out top for GDP growth.2
Amongst the developed cities, Seoul appears to be the
exception, with a shrinking population, partly due to
an ongoing government-led decentralisation initiative,
where some state-run corporations and ministries have
and will be relocated to other parts of the country. The
city and its immediate provinces, however, are still home
to more than half of the country’s population. Growing
urbanisation in the APAC region is expected to continue
over the next decade, driven by both internal migration
and foreign immigration as urbanised areas continue
to provide a rich offering for people to live, work and
play. This population growth will provide the retail sector
with a sustained domestic consumer base that requires
goods and services. The scarcity of land in gateway cities
across APAC is also driving higher urban density, with the
number of residential units increasing to accommodate
migration, which boosts the wealth effect.
Tokyo Prefecture Hong Kong Sydney Seoul Singapore
2008 2017 2022 2027
0
2
4
6
8
10
12
14
16
Figure 1: Population of key APAC cities (millions)
Source: Oxford Economics, Jan 2018.
Tokyo Hong Kong Sydney Singapore Seoul
5 yr CAGR (2017-2022) 10-yr CAGR (2017-2027)
(%)
0
1
2
3
4
5
6
Figure 2: Real income CAGR
Source: M&G Real Estate, Oxford Economics, Jan 2018.
05
Additional consumption demand from growing intra-regional tourism International tourism has expanded in APAC off
the back of a burgeoning middle class and the
increasing affordability of travel, as transport
infrastructure continues to develop.
Asia Pacific recorded 308 million international tourist
arrivals in 2016 – an increase of 9% year-on-year.
The World Tourism Organisation (UNWTO) forecasts
arrivals to increase by 331 million to reach 535 million
in 2030, equating to annual growth of almost 5%.
The large majority of international travel is intra-regional
in APAC. Aggregated numbers reveal that tourists from
the same region account for between 60 to 90 per cent
of overall tourism in the five developed APAC markets
in 2016 (Figure 3).4 These five markets should continue
to benefit from increasing tourist arrivals as consumers
in emerging countries within the APAC region, such as
China, India, and south east Asian cities, become more
affluent. Japan, in particular, is highly popular amongst
APAC tourists, and has registered annual double-digit
growth of tourist arrivals for six consecutive years from
2012 to 2017. According to Euromonitor data, Hong
Kong was the most visited city in 2017, primarily owing
to its proximity to China.5
These macro fundamentals of additional consumption
demand, rising income levels and stable population
growth combine to support a growing and more affluent
shopping population, which is driving retailers’ sentiment
towards retail space expansion. This is evidenced by
the fact that the developed APAC markets continue to
attract interest from international retailers. According to
CBRE,6 these five markets and China were international
retailers’ top preferred markets for expansion in APAC
(Figure 4), probably due to their proven sales success
and strong tourism appeal.
4 M&G Real Estate based on data from government agencies of Australia,
Hong Kong, Japan, Singapore and South Korea, March 2018.5 Euromonitor International ‘Top 100 City Destinations’, November 2017.
6 CBRE ‘How active are retailers in APAC?’ report, 2017.
Australia Hong Kong Japan Singapore South Korea
China Rest of Asia Pacific Others
(%)
0
10
20
30
40
50
60
70
80
90
100
Figure 3: Distribution of inbound tourist arrivals
Source: M&G Real Estate, Mar 2018.
% o
f re
spo
nd
en
ts
0
5
10
15
20
25
Ho
ng
Ko
ng
Ch
ina
Jap
an
Sin
ga
po
re
Au
stra
lia
So
uth
Ko
rea
Ind
ia
Taiw
an
Ma
lays
ia
Th
aila
nd
Ma
cau
Ph
illip
pin
es
Ind
on
esi
a
Ne
w Z
ea
lan
d
Vie
tna
m
Figure 4: International retailers’ preferred markets
for expansion
Source: CBRE, 2017.
Consumers seek retail spaces to fulfil social engagement Even as e-commerce grows in APAC, shopping centres
and high street retail areas remain a common ‘third
place’ for consumers to gather outside of their homes
and work places. This is, in part, due to the fact that
homes in Asian cities, such as Hong Kong and Tokyo, are
relatively small compared to those in the US and Europe,
and instead people typically meet in shopping centres to
socialise in a pleasant climate-controlled environment.
Shopping in physical stores is highly convenient in the urbanised gateway citiesIn addition, a number of shopping centres, such as
super-regional centres in Australia, Hong Kong, and
suburban shopping centres in Singapore, are located
within dense residential areas. They form an integral
part of the fabric of the district and offer highly
convenient shopping for locals, with strong connections
to public transport nodes. According to a CBRE consumer
survey report,7 92% of those surveyed in Hong Kong use
public transport, walk or cycle to visit shopping centres,
as do 74% in Greater Tokyo, and 72% in Singapore. This
easy and convenient access to retailers also partially
explains why e-commerce penetration in these three
markets is relatively low (Figure 5).
High dining out frequency drives longer retail trading hours and builds resilience against e-commerce There is also a high tendency for people to dine out
regularly in Asia Pacific. A survey by Nielsen8 revealed
that 30% of respondents in the region ate out at least
three to six times a week. This was higher than the
27% recorded for North America and 9% in Europe.
Hong Kong took the top rank with the highest
proportion of respondents who dined out once a day
or more frequently (26%), while Singapore (19%) also
exceeded the global average of 9%.
This trend could be attributed to people working longer
hours in Asia, opting to eat out rather than at home,
and smaller residential units with no room for storage
or large freezers. This drives the 24-hour activity seen
in some high-density Asia cities, including Tokyo, Hong
Kong, Singapore and Seoul. This translates to longer
trading hours and higher footfall, which boosts the retail
market. It also helps landlords to build more defensive
retail assets; food & beverage (F&B) tenants now take
up about 30-40% of shopping centres' net lettable area
(NLA) in Singapore, compared to the previous average
of 20% prior to 2014.9
06
7 CBRE Asia Pacific Consumer Survey report, 2014. 8 Nielsen ‘What’s in our food and on our minds’ report, August 2016.9 M&G Real Estate, 2014, 2017.
Favourable conditions help buoy the retail sector
Source: M&G Real Estate.
Transport connectivity Digital connectivity Tourism
Attractive environment Dining out Omni-channel
07
More experiential and social elements in APAC shopping centres observed
Landlords have increasingly taken note of the growing importance of ‘destination’ appeal to retail, creating
shopping centres that fulfil consumers’ need for social engagement, education and services. The proportion of
F&B, lifestyle, entertainment and service tenants has increased in Asia Pacific; these sectors are also viewed as
more defensive against the rise of e-commerce. Inclusive family experiences are offered as part of a day out,
such as rock climbing, enrichment classes, and onsite playgrounds for children. Landlords also regularly organise
events, exhibitions and programmes to enhance visitor engagement. As there is a larger proportion of the older
generation living in developed Asia markets compared to emerging markets catering for the whole family is
important, from children to Generation X.
This is practised at our shopping centre in Singapore, Compass One. The asset is a suburban shopping centre
that is connected to the local Mass Rapid Transit, Light-Rail Train lines, and a bus interchange. The majority of
shoppers in Compass One are young couples and families who live within the Sengkang planning area. As part
of a significant refurbishment programme, we have reconfigured our offering to include a public library that spans
two floors, education centres, and an outdoor playground. This allows the centre to be a focal point for learning
and recreation for the surrounding suburban community. F&B tenants make up more than 30% of Compass One’s
NLA, while services, including health and beauty, occupy around 15% and leisure/sports just under 7%. We have
also held a number of events for the community such as charity fundraisers and learning workshops to engage
customers and create a buzz of activity within the centre. These events, along with tenant promotions, are posted
on various social media accounts which allow us to track the engagements rate of each campaign, what is trending
amongst our shoppers, and plan better for future online marketing.
In Japan and Singapore, there has been an emergence of ‘maker spaces’ where equipment is offered to enable
individuals to craft their own goods. This attracts consumers without the technical knowledge or space in their
apartments for such projects and as a result of this trend, the home improvement market in Asia is expected to show
sustained growth of 20% over the next five years, according to JLL. Higher value discretionary items, like home and
garden, consumer appliances and electronics, have proved to be more resilient against the impact of e-commerce,
as consumers value shopping in-store for these products to see, touch and test them to assess their quality.
Compass One, Sengkang, SingaporeCompass One, Sengkang, Singapore
The retail sector is undergoing structural change driven
by the rise of e-commerce and growing consumer
demand for experiences beyond the functional role
of shopping. Consumers’ expectations for convenience
and speed of delivery alongside experiential factors will
shape the face of retail going forward.
Both landlords and retailers face stiffer competition for
consumer spending and consequently some retailers
have consolidated their store portfolios. This disruptive
e-commerce trend is driving an evolution of the
traditional store format and an extension of retail supply
chains. In our view, this is not a death knell for retail, but
part of the creative destruction process as the sector
adjusts to the new retail age.
In 2017, internet retail sales accounted for 10% of total
retail sales on an aggregated level for the five developed
APAC markets, equivalent to around US$152 billion.
Going forward, online retail sales in the five developed
markets of APAC is expected to form a larger proportion
of total retail sales, reaching 14% of total sales by 2022,
as the sector continues to undergo structural change.
Nonetheless, given the region’s strong consumer
dynamics, in-store sales are not expected to decline as
a result of further online penetration and will remain a
dominant sales channel for retailers in the region.
The degree of online penetration has varied across the
different markets due to factors such as population
density, transport and technological development. In
most cases, the growth rate of online sales is expected
to slow down, as e-commerce matures within the five
developed APAC markets and grows from a much larger
sales base. Although this will vary depending on local
market characteristics. For example, Hong Kong appears
to be the exception, with the annual growth of internet
retail sales expected to continue picking up in the same
period. This is likely due to the currently low internet
sales penetration and internet sales volume in the city.
Therefore, the disruption of online retail should ease
in some of the developed countries in the APAC region,
as e-commerce matures and the retail sector continues
to innovate by creating an offer that is tailored to the
local catchment, enabling social engagement and
omni-channel to drive footfall and in-store retail sales.
Source: Euromonitor, February 2018
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Hong Kong, China
Japan
Singapore
South Korea
Australia
Asia Pacific
(%)
0
5
10
15
20
25
30
Figure 5: Proportion of internet retail sales to total
retail sales volume
Source: Euromonitor, February 2018.
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Hong Kong, China
Japan
Singapore
South Korea
Australia
Asia Pacific
(%)
0
10
20
30
40
50
60
Figure 6: Y-o-y growth of internet retail sales
08
E-commerce is not the death knell for retail in APAC
Strategies for a new retail age require scale
With the growth of e-commerce, consumers now have more shopping options and price transparency and
therefore no longer expect retail to merely fulfil their consumption needs. The process and experience of shopping,
instead, play a more integral role in attracting and retaining consumers. Retail landlords therefore need to
implement strategies that improve consumers’ shopping experience and convenience. These strategies include:
• Adopting omni-channelling by blending offline and online channels to provide consumers with a seamless
shopping experience that best suits their needs, and help physical retailers to build an online presence. In
Singapore, the owner of well-known shopping centres, CapitaLand Mall Trust, has collaborated with Lazada
– an e-commerce player backed by Alibaba – to launch an online shopping centre on Lazada’s site in which
CapitaLand’s tenants’ products are listed. Shoppers on the online mall can opt to collect their purchases at
unmanned click-and-collect lounges in the landlord’s shopping centres and will be rewarded with membership
points as part of its loyalty programme. Augmented and virtual reality are expected to become commonplace
in retail, as stores and centres digitise to integrate online and offline channels. This allows retailers to embrace
the halo effect, which involves evaluating the interaction between stores and digital channels to optimise
their impact.
• Leveraging technology for improved customer analytics and effective targeting. Big data can be collated
and analysed to help landlords become more effective in their targeting of customers and delivery of shopping
incentives. Such methods include the implementation of loyalty programmes to analyse customer expenditure
and profile or the use of video analytics and algorithms, such as geo-fencing, to track how customers navigate
a shopping centre and the dwell-time in specific areas for better space planning and tenant positioning. Major
Australian retail landlord Westfield Corporation created a lab to test retail technology and last year set up a
retail technology network ‘OneMarket’ to facilitate collaboration, data sharing, and the implementation of new
technologies among retailers and business partners. The platform is set to connect retailers with shoppers, for
example notifying them when they are near a store that a product they’ve searched for online is available or
cheaper elsewhere.
• Implementing place-making initiatives to create social ‘destination’ appeal to elevate shoppers’ experience. Some of the most architecturally impressive retail is in Asia, such as the Prada store in Tokyo or
the Louis Vuitton pavilion, Marina Bay Sands, Singapore. Delivering an immersive experience through external
design, alongside internal services, can help landlords gain a competitive advantage and attract higher footfall.
This could be through the allocation of more space to social and entertainment purposes or the organisation
of regular events, such as exhibitions or holiday-related activities. Starfield Goyang, a super-regional shopping
centre in South Korea, has 30% of space set aside for non-retail attractions such as a spa and a rooftop pool,
indoor rock climbing walls and basketball courts. It has also held events where fans can meet their favourite pop
singers or actors to get autographs.
The execution of such strategies is, however, associated with high costs and efforts due to their nascent and complex
nature or capital expenditure requirements. Retail landlords with a larger scale are therefore more likely to be in the
position to implement them; those with a bigger real estate portfolio would also be able to amass more data for
better analysis of customers and their preferences in this new omni-channel retail age.
09
Physical retail is expected to remain relevant in the
five developed APAC markets as a key channel for
consumers, by providing cultural touchpoints and
as an important facet of an omni-channel strategy.
Long-term trends of stable population growth, rising
incomes, and increasing intra-regional tourism for the
key cities in APAC provide growth opportunities for
retail. Affluent, well-connected cities also offer retailers
large catchment areas, as shopping centres and high
street retail areas are integral to the fabric and appeal
of the area to domestic consumers and tourists. Assets
in strong locations thus stand to attract a wider pool of
tenants looking to set up flagship stores and showrooms.
In this new retail age, active asset management has
become even more critical to returns. For example,
some landlords are driving demand for smaller units
with the potential to subdivide anchor space to improve
the tenant mix and drive rents. Scale is becoming
increasingly important in retail, as a combination of
technological advancement, targeted marketing and
place-making strategies are necessary to maintain and
grow market share.
For shopping centres, our preferred investment scenario
would be a management strategy (i.e. purchase of
partial stakes), working with established operators who
have knowledge of the market and the resources to
maximise asset performance. Super-regional shopping
centres and high street retail in prime areas, attracting
locals and tourists, are preferred investment assets,
alongside large, suburban shopping centres in growing
catchment areas, close to residential development and
served by strong transport links.
10
Conclusion
11
Contact
Eunice Khoo Senior Associate, Property Research Asia +65 6436 5362
Jonathan Hsu Director, Head of Research, Asia +65 6436 5353
Richard Gwilliam Head of Property Research +44 (0)20 7548 6863
Christopher Andrews, CFA Head of Client Relationships and Marketing, Real Estate +65 6436 5331
Stefan Cornelissen Director of Institutional Business Benelux, Nordics and Switzerland +31 (0)20 799 7680
Manuele de Gennaro Head of Institutional Distribution, Switzerland +41 (0)43 443 8206
Robert Heaney Director, Institutional Business, Nordics +46 7 0266 4424
Costanza Morea Sales Manager: Italy
+39 02 3206 5551
Lucy Williams Director, Institutional Business UK and Europe, Real Estate +44 (0)20 7548 6585
www.mandgrealestate.com
For Investment Professionals only.
This document is for investment professionals only and should not be passed to anyone else as further distribution might
be restricted or illegal in certain jurisdictions. The distribution of this document does not constitute an offer or solicitation.
Past performance is not a guide to future performance. The value of investments can fall as well as rise. There is no
guarantee that these investment strategies will work under all market conditions or are suitable for all investors and you
should ensure you understand the risk profile of the products or services you plan to purchase. This document is issued by
M&G Investment Management Limited (except if noted otherwise below). The services and products provided by M&G
Investment Management Limited are available only to investors who come within the category of the Professional Client as
defined in the Financial Conduct Authority’s Handbook. They are not available to individual investors, who should not rely
on this communication. Information given in this document has been obtained from, or based upon, sources believed by
us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents. M&G does not offer
investment advice or make recommendations regarding investments. Opinions are subject to change without notice.
Notice to recipients in Australia: M&G Investment Management Limited does not hold an Australian financial services
licence and is exempt from the requirement to hold one for the financial services it provides. M&G Investment Management
Limited is regulated by the Financial Conduct Authority under the laws of the UK which differ from Australian laws.
Notice to recipients in Hong Kong: The contents of this document have not been reviewed by any regulatory authority
in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent
professional advice.
Notice to recipients in Singapore: This document is issued by M&G Real Estate Asia Pte Ltd. This document may not
be circulated or distributed, whether directly or indirectly, to persons in Singapore other than (i) an institutional investor
pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”) or (ii) otherwise pursuant
to, and in accordance with the conditions of, any other applicable provision of the SFA.
M&G Investments and M&G Real Estate are business names of M&G Investment Management Limited and are used
by other companies within the Prudential Group. M&G Investment Management Limited is registered in England and
Wales under numbers 936683 with its registered office at Laurence Pountney Hill, London EC4R 0HH. M&G Investment
Management Limited is authorised and regulated by the Financial Conduct Authority. M&G Real Estate Limited is
registered in England and Wales under number 3852763 with its registered office at Laurence Pountney Hill, London EC4R
0HH. M&G Real Estate Limited forms part of the M&G Group of companies. M&G Investment Management Limited and
M&G Real Estate Limited are indirect subsidiaries of Prudential plc of the United Kingdom. Prudential plc and its affiliated
companies constitute one of the world’s leading financial services groups and is not affiliated in any manner with Prudential
Financial, Inc, a company whose principal place of business is in the United States of America. APR 18 / W279307