Betting on a Spending Boost, Investors Eye China’s Retail Space

Even as China keeps a tight rein on the property sector, an expected boost in consumer spending is making the retail space especially attractive to investors, say market observers.

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A slowdown in the economy, which grew at its slackest pace in more than three years in the second quarter, has not dampened the outlook for domestic consumption. Consumption is estimated to rise to about 45 percent of GDP by 2015 from 36 percent last year. This in turn should boost demand for shopping and entertainment centers, experts tell CNBC.

“There has been some weakness in luxury retail sales across China. (But) what investors and retailers are really focused on, is the strategic, long-term growth in middle, upper-level incomes and more disposable incomes from middle class families,” Nick Axford, Head of Research for Asia Pacific at real estate services firm CBRE told CNBC Asia’s “Squawk Box”.

“That’s going to drive huge demand for consumer goods not just at the luxury end but the mass market end also. And that’s what many of the retail groups are looking to target and that’s why investors are seeing opportunities in that more modern shopping mall space,” he added.

CapitaLand, Southeast Asia’s largest property developer, said late last year that it planned to double the number of shopping malls it has in China to 100.

Hong Kong-listed Hang Lung Properties expects to complete one new shopping mall a year over the next five years in mainland China. It said earlier this year that it expects leasing profits from China to soon surpass those from Hong Kong.

In recent years, luxury goods companies such as Hermes and food and beverage firms including Starbucks , the world’s biggest coffee chain, have expanded into China betting on increased demand from a growing class of consumers.

Expectations for increased consumer spending have been underpinned by rising wages. The Chinese government has targeted a minimum annual wage growth of about 13 percent in the five years to 2015.

And despite the slowdown in China’s economy, the jobs market is tight, helping to support spending by consumers. And experts say the retail property market is a central part of the consumption story.

“Property is a key thing going forward. China still needs low-cost housing. That means they will be building homes and if you’re building homes and people are buying them and filling them with goods then that is a key part of the domestic consumption story,” said Andrew Sullivan, Principal Sales Trader at Piper Jaffray Asia Securities.

By CNBC's Dhara Ranasinghe

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