APPD Market Report Article

Hong Kong

May 31, 2022

-10.2%

HKD 189

Decline
Slowing

Online sales has grown amidst tightened social distancing measures

  • The fifth wave of COVID-19 in Hong Kong put an end to the 12-month streak in retail sales growth. Total retail sales dropped by 4.9% y-o-y in the first two months of 2022. While most major retail outlets were negatively affected, online sales were robust and surged by 39.1% during the same period.
  • In 1Q22, retailers in general postponed their expansion plans. A handful continued with their plans and committed to new outlets on the back of more affordable rentals. Supermarkets, dispensary and drug stores were the major sources of leasing demand during the quarter.

A new wave of supply is due to be injected into the retail market

  • Around 2.3 million sq ft of new supply is set to be completed this year. Of which, phase 1 of the 11 SKIES project was completed during the quarter, consisting of around 1.1 million sq ft of retail, dining and entertainment. All the other projects slated for 2022 completion are located in non-core areas, predominantly office/residential along with retail.
  • The commercial site (TCTL 45) at Area 57, Tung Chung, was awarded to Chinachem for HKD 2.778 billion in March. According to Chinachem, the site will be developed into a commercial complex, with up to 380,000 sq ft (30% of the total GFA) to be used for retail purpose.

Market yields have compressed mildly across the board

  • The large-scale outbreak of Omicron translated into some rental and vacancy pressures across the board in 1Q22. High street shop rentals (on effective rent basis) dropped by 6.8% q-o-q. Meanwhile, the footfall of prime shopping centres dropped considerably, which led to q-o-q rental declines of 3.1% and 4.2% for overall prime and premium prime shopping centres, respectively.
  • The investment market was less active in 1Q22. High street shops capital values saw a moderate correction during the quarter, dropping by 0.5% q-o-q. Sharper drops in rentals over capital values have caused market yields for both high street shops and overall prime shopping centres to see mild compression during 1Q22.

Outlook: Retail market recovery shall likely pick up in 2H22

  • Inbound tourism is expected to remain low in the near to medium term. Retail sales, predominantly domestic in nature, shall see a visible rebound as soon as the epidemic begins to stabilise and restrictions ease off. The expanded consumption voucher scheme will likely give impetus to the retail sale recovery.
  • The nascent recovery was disrupted and delayed by the fifth wave. Market sentiments will likely pick up from 2Q22 onwards. Retail capital values are expected to rise more visibly than rents, causing market yields to compress. We forecast high street shops and overall prime shopping centres rents to rise by 0-5% in 2022, and high street shops capital values to grow by 5-10% in 2022.

Note: Hong Kong Retail refers to Hong Kong's overall prime shopping centre and high street retail markets.

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