Shopping for property

Why Walmart’s become so keen on buying Chinese real estate

Shopping for property

It needs whole lot of real estate: Sam’s Club wants to expand in China

As any Sam’s Club shopper knows only too well, buying in bulk saves you money. And Sam’s Club owner Walmart, the world’s largest retailer, is hoping that it can apply the same principle when it comes to buying land. It has announced that it is planning to buy much more land in future to build new stores in China, which it predicts will be the world’s largest grocery market by 2014.

“When the site is available and meets our needs, we’ll go and work with the government directly to acquire the land-use rights,” Ed Chan, head of Walmart’s China operation, told Bloomberg.

Currently, Walmart rents space in the malls in which it operates. But many of its leases are coming up for renewal, and rents are almost definitely going to go up. That’s because when the leases were first signed, local governments gave enormous discounts in hopes of boosting real estate value nearby. CBN Weekly reckons that Walmart has often been paying 40% less in rent than commercial neighbours.

Walmart is not the only retailer to pursue a property ownership strategy. Home-furnishing giant IKEA also plans to spend about Rmb5 billion ($763 million) on a new shopping centre in Beijing to which the Swedish chain’s second store in the city will be connected, says 21CN Business Herald.

Tesco, too, has been buying land. It now owns four so-called Lifespace malls – big shopping centres anchored by a Tesco hypermarket, but incorporating additional retail and residential space. Five more are under construction. The company recently joined forces with Singapore’s Metro in a $280 million joint venture with HSBC’s Specialist Investments to develop three shopping malls.

Germany’s Metro is also an active investor in the Chinese property market. The retailer has bought up more than 30 plots of land around the country.

Analysts say it often makes sense for retailers to build their own malls. “Buying land will not only resist the continuing pressure from increase in rental prices, the company will also make money when the land goes up in value,” says a company insider at Metro.

Walmart has an additional motive – size. Its wholesale retailer Sam’s Club has struggled to open new stores in China, partly because sourcing premises that meets its requirements can be a major headache.

The warehouse club demands a lot of space: each site needs to be least 24,000 square metres, and with car ownership growing in China, the mega-outlets also require enough space to park at least 1,000 vehicles.

As it has tried to expand, Walmart has discovered that plenty of potential sites are just not up to standard. So it is dealing with the problem in a straightforward way; building its own malls. The company’s seventh Sam’s Club outlet in China – this one located in the northeastern port city of Dalian – is the first to be built by a Walmart subsidiary, says Chan. But Walmart is also in talks with local governments in cities like Suzhou, Ningbo and Xiamen to build more.

The new strategy will give Walmart much greater control over its retail property, and also let it work with local governments in implementing their urbanisation plans. Industry observers say many second- and third-tier cities remain eager to work with the US giant. That’s because when the company opens a store in the area, nearby residential property values go up by almost a third and commercial rents can jump more than 50%, says CBN Weekly.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.