High consumer confidence, influx of Chinese tourists spur retail boom
Miah Yang is director of retail services at Savills Korea.
By Miah Yang
Have you been to Myeongdong recently? Or Times Square in Yeongdeungpo? How about the new premium outlet in Paju? Shopping used to be considered only for females but a trip to one of these shopping malls or districts will convince you that it is fun for the entire family.
Many Japanese and Chinese tourists flock to these shopping areas in much the same way many Koreans like to visit the Pacific Place in Hong Kong or Orchard Road in Singapore. Do you know why? Besides hallyu, or Korean wave, Korea has a unique shopping culture and brands that are loved by tourists from different countries.
I would like to talk about shopping trends and how these changes impact the commercial real estate market.
Shopping is spending. Therefore we need to go over consumer confidence which is directly related to retail business. While European consumer confidence suffered another blow last year, Korea's retail sector managed to stay in positive territory. Overall consumer spending looks optimistic with the consumer confidence index maintaining solid levels above 100 in May 2010. This suggests that Koreans believe the worst is over, and although the economy is expected to slow down in 2011, Korea's GDP is still expected to stand strong with a growth rate of 4.5 percent, a view shared both by the IMF and Bank of Korea.
With favourable currency conditions and increased interest in Korean pop-culture, the country experienced an unprecedented surge in international visitors in 2010. As a result, several retail sectors benefited from a boost in sales volume, most notably luxury goods and cosmetics sold in department stores, along with local retailers in popular tourist areas such as Myeongdong and Hongdae.
The number of Chinese visitors also hit a record high in 2010, due largely to eased visa regulations. Chinese tourists spend more than those from Japan, the U.S. and Australia and are responsible for an estimated 3.2 per cent of department store sales revenue.Then, what other factors are important in the retail business? I believe people like to spend money to purchase goods but also for the experience.
"Experience" has been the most important part of the evolution of the local retail environment because only two or three years ago, landlords, including department stores wouldn't have thought of utilizing a leasable area as common space for shoppers to rest and simply enjoy the convenience.
When it comes to Korea's shopping trends, Korean malls, which are outdated in terms of rent and leasing structures and until early 2000 only existed in the form of retail centers, are currently in the process of transformation.
The primary factor which resulted in the past failure of retail centers was the developers' strategy of selling small lots to individual owners to pay project finance loans to quickly recoup their investment while neglecting buyers and ignoring any future involvement in the development.
Malls and street retail
This system made it almost impossible for a consistent and professional approach to managing and operating retail complexes. As a result, such retail centers were managed poorly, which led to losses of revenue.
However, change arrived with the completion of the COEX, Korea's largest underground mall built in May 2000. After the success of introducing a western-style mall into Korea, mall developers began to open their eyes to the world of professional management in which malls would be managed efficiently by a single company.
In line with this trend, many shopping centers are set to open in Korea during the next two years. In 2011, D-Cube City Shopping Center will be completed in Shindorim while the IFC Seoul Mall is expected to open in Yeouido in 2012 with H&M, ZARA and a CGV with 9 screens as its anchor tenants. In 2012, about 200,000 square meters of land will also be transformed into the Gimpo Sky Park shopping center.
Koreans have quickly become accustomed to western-style malls and are accepting them as a destination with multiple features. Along with ongoing market entry by global Specialty Store Retailer of Private Labelled Apparel brands, and other quality products and services which are being offered, the growth prospects for Korean malls are positive.
Meanwhile, major Seoul street retail areas in Gangnam and Shinchon posted a 6.6 percent vacancy rate and rent increase of 7.7 percent, according to a report by the land and transport ministry. Steady growth in street retail is expected to continue in 2011 driven by Chinese tourists and continuing economic growth.
Retail transactions in 2010
Based on strong consumer confidence and an increasing number of Chinese and Japanese tourists, Korea's retail sales for both luxury brands and major retail products will be very strong in comparison to other Asian countries.
As a result of this, many global fashion brands and famous restaurants are knocking on the door to enter the Korean market and to be part of this growth. Abercrombie & Fitch and other European sports category killer retailers are actively seeking sites.
Savills retail service assists these brands to locate sites which fit their needs and to convince landlords to meet global retail standards. Powerful global brands are not familiar with uncompromising local lease practices and therefore they need someone who knows local practices and how to handle landlords on their behalf.
Lastly, we go over retail transactions from the point of view of investors.
Major transactions in 2010 included Lotte Mart disposing of six retail branches under sell-and-leaseback agreements for a total price of approximately 600 billion won; E-land purchasing the Grand Department Store for 95 billion won; and New Songdo International Company selling Songdo city lots for 150 billion won to Lotte Asset Development Company for development as the Lotte Shopping Mall.
The sell-and-leaseback retail investment opportunities presented to the market were a reflection of large companies seeking to free up cash.
Going forward, it is likely that major players will continue to slim down their asset portfolios to maximize utilization as well as retail investment opportunities, and further exchanges are expected in the Korean retail market.
When I work I always remember the phrase: "Whoever said money can't buy happiness simply didn't know where to go shopping." Hence, I believe the government should open its eyes to how important retail businesses are to increase tourism numbers and to add economic value in the future.