Tepid retail market sentiment

• Retail sales growth stalled in 4Q22. Total retail sales dropped by 0.2% in October and November as domestic consumption was largely stagnant in the absence of inbound tourists’ spending. Meanwhile, the rise in outbound travel in the final months of the year could potentially reduce local spending, posing further challenges to local retailers.
• Amid macroeconomic uncertainty and the pandemic’s grip on the economy, leasing activities were expectedly low. Some retailers took advantage of the limited bargain hunt opportunities at certain prime street spots. F&B, mass fashion retailers, dispensary and drug stores were the major sources of leasing demand during the quarter.

Vacancy ramps up due to new supply and lack of inbound visitors

• In 4Q22, two new projects in non-core areas were completed — One North in Yuen Long and the office-cum-retail complex, the Millennity in Kwun Tong, which added 613,000 sq ft to stock. This high volume of new supply exerted more vacancy pressure on shopping centres. Meanwhile, the vacancy rate in prime streets remained high at 16.6% as inbound leisure tourists were yet to return.
• The commercial site (Lot 1077 in SD3) on Anderson Road in Kwun Tong, providing 110,287 sq ft of retail space, was awarded to Sun Hung Kai Properties during the quarter. The site is intended to be developed into a mid-end shopping centre in addition to the community commercial facilities nearby.

Investment activity concentrates in non-core areas

• Rents of Overall Prime shopping centres were effectively flat during the quarter, while that of High Streets dwindled. Rents at Prime shopping centres have managed to hold considerably better than those at High Streets given portfolio landlords’ superior tenancy management which kept vacancy reasonably low, hence keeping rents largely unchanged.
• Limited sales transactions reflected softened investment sentiment during the quarter, while activities continued to gravitate towards non-core areas. The capital values of High Street shops dropped by 2.6%, compared to 1.7% in rents, resulting in a mild increase in the market yield. Capital values of shopping centres remained flat during the quarter.

Outlook: The retail market is set to rebound and return to normalcy

• A more visible market recovery is expected in early 2023, with travel restrictions lifted in late December. The rise in tourists’ spending is anticipated to stimulate market confidence, although this may only be reflected later in 2023. The expected return of tourists and locals’ outbound travel may also shift the market focus from non-core locations back to prime high streets.
• Successive interest rate hikes are expected to keep capital values in check in the near term. In 2023, rental values of High Street shops are expected to rise 10%-15% in view of the imminent return of tourists spurred by the border reopening. Subject to a trade mix transformation and surge in new supply, shopping centres could experience a relatively slower rental growth of 0%-5%.