UBS is bullish on Chinese shopping malls. Buy these stocks to play the trend.

In fact, a team of UBS analysts led by John Lam estimates that the number of Chinese luxury malls is likely to double in the near term, as market conditions create a win-win situation for some stocks.

It is true that per capita malls in China are only 10% of US levels and a third of those in Hong Kong, Singapore and Japan. It is also true that the contribution of private consumption to the Chinese economy, measured at 39% of gross domestic product, remains well below the range of 49% to 68% of developed markets.

But instead of being catastrophic for retail, this landscape suggests huge growth potential, and Lam’s team made five bullish predictions for Chinese malls over the next five years in a report released Thursday.

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The first prediction is that more luxury shopping centers are needed to meet demand. The Covid-19 pandemic has given e-commerce platforms a huge boost, but analysts believe in-store shopping will remain popular for luxury and convenience goods.

Drawing on data from more than 1,200 malls and 3,400 stores, UBS found that luxury brands are under-penetrated in mainland China, and bank analysts estimate that 90 luxury malls – focused on premium brands – are needed over the next five years, up from 45 now. Luxury brands such as

LVMH

and Gucci, owned by

Kering,

are expected to expand, especially in Tier 2 cities like Foshan, Xiamen, and Fuzhou.

UBS’s second prediction is that the Chinese government’s focus on urban development focused on public transport will create a new business opportunity for developers: railroad plus real estate. There is a new $ 2.8 trillion market for these types of developments, in which retail spaces are built in tandem with sustainable infrastructure. Not only should this be a boost for environmental, social and governance-oriented investors, but the high barrier to entry will favor incumbent developers.

This brings us to Lam and his team’s third prediction: that the winners will take it all. The limitations of developers’ balance sheets and the lack of real estate investment trusts, or REITs, in China have led to a fragmented market, analysts say. “The market share of the top 10 shopping center managers is only 19%, in terms of the number of shopping centers under management,” they said. “We think there is a lot of room for consolidation.”

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Additionally, the business model will shift from asset manager to investment manager, analysts said. Regulatory restrictions on promoters’ balance sheets make it likely that the development investment role will be fulfilled by financial institutions. Asset managers will likely join banks in financing projects and could even take on a role similar to that of giants like Brookfield or Blackstone if they charge fund management fees.

The latest prediction from UBS analysts is that membership data will boost profits. “Membership data allows mall managers to assess the latest consumer trend, especially with the very rapid changes in consumer behavior in mainland China,” analysts said. “This makes it easier to supply tenants, reshuffle and more targeted marketing for tenants and further strengthens the bargaining power of mall managers over tenants.”

The UBS team’s outlook for Chinese shopping malls may also pave the way for big stock market gains. The changing environment will benefit the most

China Resources Land

—The country’s largest luxury owner – and commercial property manager

China Mixc Resources,

they said.

Developer Hong Kong

Longfor

and Guangdong

Yuexiu Property,

both recently upgraded to buy at neutral by UBS, are also expected to gain, as is

Powerlong Real Estate Holdings,

Powerlong commercial management,

and property manager

Hang the lung.

Investors interested in the ESG angle of transit-focused development should watch the rail giants

Chinese railway group

and

Railway construction in China,

who will likely benefit from new construction financing, analysts said.