The global pandemic is unlikely to lift completely in the near future, at least for the next three to six months, and unrestricted international travel is very unlikely until a vaccine becomes widely available.
The post-COVID outlook for Hong Kong’s retail industry therefore remains very challenging and it is difficult to predict future development trends given the constantly evolving nature of the epidemic. Some structural changes in the demand profile and market fundamentals are underway and both retailers and landlords need to adapt to stay relevant. A slower-than-expected recovery in the tourism market means that a more balanced approach to local consumers and mainland tourists is warranted moving forward but the shopping preferences of locals and tourists are of course quite different.
In the short-term, landlords and retailers will have to rely on domestic demand and local consumption. Domestic demand has proven to be relatively stable and has remained reasonably resilient during the pandemic period. However, the short-term outlook for domestic demand will hinge on the local epidemic and broader economic situation. The unemployment rate is expected to continue to rise in the near near-term, especially when the government begins to taper its employment support subsidies. A distressed labour market could undermine local consumer sentiment and spending power, and consequently the strength of any recovery in the retail market. However, we believe domestic demand will recover quickly when the local situation returns to normal later this year.
The retail scene will shift from luxury and general retail to mid-market and “whole of life” offerings. Local consumers are more focused on their “whole of life” and necessity needs, prioritizing health and well-being, caring about their families and community, and valuing local culture and sustainability. Retail categories such as lifestyle brands, health-related products and affordable family-friendly retailers which appeal to domestic shoppers will have a greater presence in the market moving forwards. Furthermore, F&B will remain strong in a more locally driven market, as dining out remains an important part of the social life of local consumers. Local spending represents the key demand driver of the F&B sector, which has accounted for 75% of total restaurant receipts over the past 10 years on average.
As the new year begins it is the time to look ahead to the road to recovery. The COVID induced uncertainty has made economic and market forecasting extremely difficult. Despite the fact that Savills in-house forecasting model captures the economic and retail market performance data of the SARS period in 2003, the duration and scale of impact of the two crises are very different rendering the historical data less relevant. Savills retail rental forecast model takes into account retail sales growth, local unemployment and visitor shopping spending, as well as retail sales productivity (i.e. retail sales per sq ft of total retail stock). Despite the uncertainties of global tourism we have made assumptions on the recovery of total retail sales and visitor arrivals over the next few years.
Visitor arrivals virtually vanished in 2020, dropping by nearly 93% YoY over the first 10 months of the year. Nevertheless, we expect the tourism market to recover gradually over the next three years when the global pandemic passes and COVID vaccines become widely available. Given the extremely low base in 2020, we predict that visitor numbers will rebound by 150% in 2021 to around 9.8 million, which is about 15% of the 2018 peak or similar to 1994/95 levels. We expect same-day visitors will be the first group to return in 2021. This will be followed by a 123% rise in 2022 to around 22 million (similar to 2004 post-SARS levels) and then 92% to 42 million (similar to 2010/2011 post-Global Financial Crisis levels) when the overnight visitor and long-haul markets start to pick up in earnest.
The recovery in tourism will certainly reinvigorate the retail market. The return of tourists and their shopping spending will fuel growth in total retail sales of between 5.5% and 15.1% from 2021 to 2023. According to forecasts by FocusEconomics, a service provider of consensus economic forecasts from over 30 independent institutes, the local labour market will also improve gradually once the economy recovers from the damage of the coronavirus.
Annual visitor arrivals and projections by Savills, 2010 – 2024F
Total retail sales and projections by Savills, 2010-2024F
Key assumptions and rental forecasts, 2021F-2023F
Based on our assumptions, we anticipate a further drop in both prime street shop rents and shopping centre rents by 2 to 5% in 2021. With the recovery of the overnight/long-haul visitor market prime street shop rents are likely to bounce back by 7 to 10% in 2022 and a further 20 to 23% in 2023 while shopping centres will recover by 5 to 10% per annum over the same period.