How Hong Kong’s retail property sector is being pulled in two different directions
- A leasing market driven by domestic consumption, and powered by F&B operators, is helping the city cope with its zero-Covid-induced isolation
- However, landlords are betting on the return of luxury shoppers from the mainland, keeping the vacancy rate high
In its midyear review published in August, CBRE predicted that high street rents in prime locations in Hong Kong would rise 5 per cent year on year this year, the strongest growth in the Asia-Pacific region, and a dramatic turnaround from the sharp fall in 2020.
According to data from CBRE, prime high street rents fell a staggering 40.7 per cent in the three years to the third quarter of this year.
The disappearance of mainland tourists has accelerated a shift away from luxury and premium brands targeting wealthier Chinese shoppers towards mid-to-mass market retailers catering to the city’s residents. One in five shops selling jewellery, cosmetics, clothing and leather goods have shut down since the third quarter of 2018, data from Midland IC&I shows.
A report published by Savills last month noted that F&B operators are performing strongly across all price points, from fine dining to casual restaurants. Moreover, the sector’s prominent role in driving leasing volumes comes at a time when the pandemic has accelerated the push towards experiential retail.
Shopping centre landlords the world over are eager to introduce experience-oriented concepts to increase footfall and help counter the threat posed by online shopping. “F&B offerings help shopping centres differentiate themselves” said Barrie Chan, head of retail at Savills in Hong Kong.
Demand from F&B retailers, and the shift towards domestic consumption more broadly, are bound to intensify in the coming quarters.
Hong Kong retailers get the shivers as Shenzhen explores duty-free zone idea
With Chinese shoppers accounting for as much as a third of the city’s retail sales before the pandemic, domestic consumption can only go so far in shoring up the leasing market, particularly in the prime shopping districts once frequented by wealthy mainland visitors.
For a sector whose fortunes have been indelibly tied to sentiment among affluent Chinese consumers, there is some degree of denial among landlords with prime retail space about the forces reshaping the industry, and the speed of the rebound in rents once the border with the mainland reopens.
This explains why many owners refuse to adjust their rents sufficiently, causing the overall high street vacancy rate in core locations to rise last quarter despite the pickup in leasing activity.
Chan said “many landlords have strong holding power”, having purchased their shops decades ago at extremely low prices, allowing owners to remain profitable despite the sharp decline in their rental income.
Hong Kong’s retail property sector is being pulled in different directions. A leasing market driven by domestic consumption, and powered by F&B operators, is helping the city cope with its zero-Covid-induced isolation. Yet, many landlords are betting on a tourist-led recovery in premium and luxury retail, keeping vacancy rates high.
Just as the former is not strong enough to create the conditions for a sustainable recovery, the latter could take a lot longer, and prove weaker, than anticipated.
Nicholas Spiro is a partner at Lauressa Advisory