International Appraiser: Objective valuation advice on international real estate: “RED STAR MACALLINE MALLS” in China

Wednesday, April 11, 2012

“RED STAR MACALLINE MALLS” in China

Red Star Macalline Mall on Shanghai's northwest side, from which I took the featured interior photos

In recent posts concerning Perennial China Retail Trust, I have referred to this unique retail mall type, a mall that specializes exclusively in furniture and home furnishings to retail end-users in an attractive, upscale setting. This mall type benefits from the virtues of agglomeration similar to the success of “auto malls” in the U.S. The object is to attract the consumer wishing to make a one-stop shopping trip in furnishing a new home.

This is a property type not commonly available to retail consumers in the U.S. The closest aesthetic equivalent I can think of is Chicago’s Merchandise Mart, which serves as a wholesale showroom mall restricted to buyers from major retailers. What Red Star Macalline does is eliminate the middleman.

Red Star Macalline began as a furniture manufacturer and morphed into an innovator in the sales of home furnishings and design services within a retail mall concept, switching from being a tenant to being a landlord. Founded in the 1980s, Red Star Macalline opened its first malls in 1991 in and sales took off, crowding out the furniture retailing efforts of western furniture vendors not sufficiently attuned to the furniture shopping habits of Chinese consumers. At last count, there are now 100 Red Star Macalline Malls in China.

At a Red Star Macalline Mall, home furnishings shoppers can haggle with individual merchants and also arrange turn-key design services. This is a consumer behavior that Home Depot and La Maison were not sufficiently accustomed to, having had to close many stores in China, but Ikea keeps persevering, even building its own store adjacent to the Pudong Red Star Macalline mall, easily seen during the taxi ride into Shanghai from the airport.

Mona Lisa bedroom set. "Faux Baroque" is said to be the preferred interior decor for China's nouveau riche.

Still, such a duplicative and complementary unit mix is somewhat risky at a time when the Chinese government has been putting the brakes on home lending. Less homes sold means less furnishings sold, and the recent shareholders’ report from PCRT confirms that Shenyang Longemont Red Star Macalline Mall has had its occupancy slip from 92% to 56% for that very stated reason. Existing tenants will be consolidated in one part of the mall while a broader array of tenants will be solicited for the remainder of the mall in Shenyang.

While the Chinese government does not publish data on household incomes, the closest figure it uses to compare city wealth is GDP per capita. Shanghai leads the mainland (excluding Hong Kong, Macau and Mongolia) with $20,000 annual GDP per capita, while Shenyang has less than half, last reported as $9244 per capita.

Sofa alone is priced at over 16,000 RMB ($2500 USD)

The recent slowdown in U.S. housing had severe consequences for the home furnishings industry, with the bankruptcy of such major furniture brands as Levitz and Wickes. While the housing sales slowdown in China is government policy-induced rather than credit-induced, there may be the hope of a quicker turnaround in furniture sales if the government policy is reversed (loosening restrictions on financing and homebuying by investors and “migrants”). In the mean time, China Central Television reported that sales at some home furnishing malls in Beijing decreased by more than 30 percent year-on-year in early 2012. Some small companies were forced out of business.

Side note on the just-published PCRT shareholders’ report for the upcoming meeting

PCRT has been slightly more forthright recently in reporting “independent valuation” results, mentioning this time (in footnotes) that the CBRE valuation is actually based on the assumption that all properties are completed and fully leased. CBRE has even raised its valuation this time. But with Shenyang Red Star’s occupancy slipping so badly, what purpose does such a hypothetical valuation serve other than to mislead shareholders? Would Warren Buffett report to shareholders in such a manner? What is the main purpose of an “independent valuation” other than to be independent and uninfluenced by the very managers whose compensation will be determined by the valuation itself, as disclosed in the IPO?