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Is China's commercial real estate market heading for trouble?

More than 50 percent of all the mall space under construction globally is happening in China. But the explosion of growth comes at a time when retail sales growth has slowed.

SINGAPORE: There has been a lot of focus lately on China's residential property market.

Is there a bubble? Or, is it quickly ballooning into a bubble?

The talk has stoked fears of a catastrophic crash, which has been further aggravated by a slowing economy.

But now, some are starting to question if there is another, perhaps bigger, property problem looming.

Talk about a shopping spree.

More than 50 percent of all the mall space under construction globally is happening in China.

Mixed-use complexes are mushrooming across the country -- chock-full of retail shops, luxury hotels and sky-high offices.

It all adds up to more than 300 million square metres of space.

Steve McCord, Head of Research, North China at JLL, said: "Right now when we look at China retail, we're seeing a huge amount of new construction across the country. From a total of about 645 shopping centres today, we're likely to reach as many as 1,150 within four years."

But the explosion of growth comes at a bad time.

Retailers are cutting back.

65 percent of luxury retailers missed their expansion targets last year, according to Knight Frank.

This is not surprising since retail sales growth has slowed from 17% in 2011 to 13% last year.

In addition, there is the booming e-commerce industry, which is luring customers and their cash away from the brick-and-mortar shops.

Online retail sales are expected to account for around 8.5% of China's total retail sales in 2014, up from 7.4% in 2013 according to Knight Frank.

All these raise the questions of whether there is an oversupply - especially in lower-tier cities -- and whether the commercial real estate market is headed for trouble.

Tata Goeyardi, head of ASEAN Real Estate Research at Religare Capital Markets, said: "I think you should be very careful (when) investing in commercial (properties).

"Unlike (investing in) a residential property where you're actually 'turning' it very quickly - in one year you try to sell it and if it doesn't sell you cut prices, you move projects. But with a commercial (property), you're stuck with it. You cannot revalue it. It sits on your books."

But not all is lost. Experts say the rising middle class will limit the vulnerability to vacancies.

JLL's Steve McCord said: "One of the reassuring things is that new consumers are formed every day. The numbers that we see show that many tier-one, tier-two, tier-three cities and even beyond are going to have 50% or more of their populations in the consumer class by 2020. They're making more money in their jobs and they're able to spend."

So for now, developers seem to be relying on the old theory that if you build it, they will come.
 

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