Retail sales growth continues to soften

• In 4Q23, inbound visitor arrivals reached 10.7 million, representing 58% of the pre-COVID-19 level in 4Q18. With 23.2 million local resident departures in the quarter, the inbound-outbound ratio widened to 1:2.2, compared to 1:1.9 in 3Q23. Retail sales in October and November were up by 10.7% y-o-y, moderating from the 15.2% growth recorded in July and August.
• Overall leasing momentum remained steady, with demand mainly coming from the light refreshments, beauty and cosmetics, and jewellery sectors. The quarter witnessed more operators from Mainland China, particularly from the mass-market F&B and light refreshment segments, making their commercial debuts in both High Street and Prime shopping centres.

Two retail project completions are postponed to 2024

• The second tower of the Twins (NKIL 6657) in Kai Tak (550,000 sq ft of 1,100,000 sq ft GFA in total) and 11 Skies Phase 2 (2.2 million sq ft GFA) in Chek Lap Kok were completed in 4Q23. Meanwhile, the target completions of YOHO Mix in Yuen Long (107,000 sq ft GFA) and Hopewell Centre II in Wan Chai (267,000 sq ft GFA) were pushed back to 2024.
• The High Street shop vacancy rate hit a new low since the pandemic, down further to 11.6% by end-4Q23 from 12.6% the previous quarter. On the other hand, the Overall Prime shopping centre vacancy rate climbed to 8.1% in 4Q23 from 6.4% the previous quarter, mainly lifted by the realisation of vacant space in newly-completed shopping centres.

Rental and capital value growth narrows further

• Retail rents in High Street shops rose by 2.3% q-o-q in the quarter, slowing from the 3.6% increase in 3Q23. Due to a continuous rebound in footfall and tenant sales in some Premium Prime malls, Overall Prime shopping centres recorded a 0.8% q-o-q rise in rents in 4Q23.
• Total sale transactions of retail property valued HKD 20 million or above increased by 3.7% q-o-q in 4Q23 despite high interest rates. Capital values rose 0.9% q-o-q in the quarter, after rising 1.7% in 3Q23.

Outlook: Recovery on track amidst widening supply-demand divergence

• In light of a sharp expansion in 2023, retail sales growth could decelerate in 2024 as base effects are likely to fade. Looking ahead, as the escalating trend of outbound travel still presents challenges to domestic consumption, a more visible recovery will be underpinned by a stronger surge in inbound tourism.
• As the market continues to recover, we expect rents of High Street retail shops and Prime shopping centres to grow 5%-10% and 0%-5%, respectively, in 2024. However, the vacancy pressure for Prime shopping centres is likely to remain, as over 1 million sq ft of new supply is expected to complete in 2024. This will further contribute to the abundant availability of space in recently completed projects.