An oversupply of retail space poses a more serious threat to property investors in the mainland's many third-tier cities than the much-talked-about housing glut, especially as an increasing number of people are buying goods online.
Recent visits to the third-tier cities of Xiamen, in Fujian province, and Yantai, in Shandong province, found both were expecting a flurry of shopping mall openings in the next three years that will shake up the local retail landscapes, now dominated by department stores.
While the housing markets in many other third-tier cities are coming off the boil, Xiamen is experiencing the mainland's biggest home price rises owing to strong demand from the Taiwanese across the strait and people from rich neighbouring cities.
Meanwhile, the housing market in Yantai is expected to land gently, as the market has mainly been driven by local end-users and prices have not increased much in the past few years.
But the outlook for the commercial property market in the two cities is much dimmer.
"Existing shopping centres are facing serious challenges from a large supply of new ones, as well as e-commerce," the Urban Land Institute said in a report last month.
It said the mainland's commercial property inventory would take much longer to digest than its residential space.
In Yantai, more than half a dozen new projects will be opened by developers including Wanda, China Resources Land and Longfor Properties.
Mainland developer Cofco Land opened Joy City, Yantai's first shopping mall, earlier this month, sparking rare traffic jams as tens of thousands visited to see about 150 global and Chinese brands debut in the city, including H&M, Zara and Gap.
Local shoppers had previously been limited to the city's New World and Aeon department stores.
Xiamen will have up to 750,000 square metres of new retail space in prime locations in the next three years. Upcoming shopping malls include Shimao's Strait International Centre, W Square by Avic and Zijin Mining, Paragon Centre Two by Paragon International, and C&D Group's Jianfa Centre.
"We will see a dramatic change in the retail landscape next year, as more international brands will be brought in by the new malls," said Apple Pan Yumin, general manager of DTZ in Xiamen. "Shopping malls here still lag behind what we see in first-tier cities."
The 126,000-square-metre SM City, which opened in December 2001, is Xiamen's most popular mall at present, but most of its 500-plus tenants are home-grown brands.
Research by global consultancy CBRE found the world's top four fast-fashion chains - Uniqlo, H&M, Zara and C&A - are quickening their penetration of small mainland cities.
They opened 59 shops in third-tier cities from June last year to March this year, compared with 24 new shops in first-tier cities during the same period.
For property developers, the biggest challenge will be how to differentiate their projects, as about 90 per cent of new commercial property supply on the mainland will be shopping malls in the next few years, according to mainland consultancy Insite China.
The mainland's retail market used to be dominated by department stores, but malls started appearing more than a decade ago in first-tier cities such as Beijing, Shanghai and Shenzhen. The trend is now spreading to third-tier cities.
At the same time, e-commerce is becoming more popular, posing a threat to local retailers. Online shopping totalled 1.85 trillion yuan (HK$2.33 trillion) last year, up 47 per cent from a year earlier, while retail sales of consumer goods rose 13.6 per cent year on year to 20.9 trillion yuan.
Langi Chiang and Sandy Li
