For some commentators, Hong Kong retail is facing its biggest test in a while. The market continues to be characterized by shrinking Mainland shopping power, disruptive e-commerce competition and changing demographics. Is it all doom and gloom, and now all tenants are wondering if the sector and the rents can adjust fast enough and come out in good shape?
Check out our highly coveted Q1 2016 Lease Transactions report to understand better where the market is really heading and how fast the shift is happening.
This Q1 Lease Transactions report sponsored by Everbright Property Investment Consultancy Ltd. shows some rents in traditional tourist districts dropping massively in the first quarter of 2016. Renewal leases are more impacted and tenants are willing to close their shops if they don’t get what they want. Some of our recorded transactions are showing rental reduction between 30 to 50% versus the past rental.
This has been compounded by a decline in overall overnight inbound tourists by 9 per cent in January and February 2016. Going deeper, the number of overnight Chinese visitors was down by 16 per cent over the first two months of the year.
The numbers couldn’t have come at a worse time on the back of 2015’s figures, which saw prime street shop rents tumbling by 30 per cent, overall overnight inbound tourists declining 4 per cent, including overnight Chinese visitors down by 6 per cent.
In real terms, inbound tourist arrivals and retail sales recorded their fastest post-SARS drop in 2015. Understandably, there is a smell of panic in the air and Hong Kong’s retail market remained generally bearish at the beginning of 2016. Market consensus is that the outlook for the prime street shop segment will remain generally gloomy over 2016.
Savills latest data suggests that prime street shop rents have almost regressed to levels not seen since before the global financial crisis. Rents will soon reach more sustainable levels, reversing the process of exponential growth from 2009 to 2013, which was driven by capital from Mainland China flooding the local economy.
To compound this issue, a shift has occurred in the profile of mainland tourists, who are increasingly arriving from second and third tier cities. These shoppers are more price sensitive and more likely to be interested in affordable luxury rather than top end jewelry or the higher end fashion brands.
High-street fashion/accessory brands and particularly active wear/sports retailers are beginning to take up space previously occupied by watches and jewelry and other Mainland-focused trades. For those streets which have proved unsuccessful during the boom times rents are not only falling but the character of the street is changing more towards food and beverage and local operators. For many this would be considered a good thing.
Looking at the shopping malls, landlords are still holding up on the rents and trying to adjust their tenants mix while staying cohesive with their image and existing tenants. In prime shopping malls, units are beginning to be subdivided. Landlords are seeking for new comer brands to Hong Kong to try to fuel their rent per sqf levels but sooner more than later we foresee that they will have to correct down their prices which are clearly not anymore justified in this environment…