Is Hong Kong no longer a retail paradise?

January 23, 2017 / By

The two-year slump—and counting—in Hong Kong’s retail sector has prompted some industry insiders to declare that its days as a shopper’s paradise are now truly in the past.

Our research paints a different picture. While a large number of retailers have been stung by the drop in sales, large rental cuts and the sudden availability of retail space has opened up opportunities for a broader range of retailers to enter the market, and this is particularly pronounced in Hong Kong’s most iconic retail strips.

Take, for instance, Russell Street in Causeway Bay. Once ranked as the most expensive retail strip in the world, it has undergone a remarkable transformation over the past two years. Luxury watch and jewellery retailers, whose stores at one time stood shoulder-to-shoulder along the street, today account for just 43 per cent of all shops leased on the street compared with 67 per cent back in 2014.  Balancing this pullback has been the growth in fashion and accessories retailers, which have doubled their presence along the street from 7 per cent in 2014 to 14 per cent in 2016.

The withdrawal of the luxury sector in the city has been well-documented with most citing the drop in mainland Chinese visitors, down 7.8 per cent y-o-y through the first eleven months of the 2016, as one of the root causes. With demand at the margins easing, High Street shop rents have fallen by about 37 per cent since peaking toward the end of 2014. Some individual shops have recorded even steeper declines. Along Russell Street, shops commanding rents as high as HKD 2,500 per sq ft during the market’s peak can today be leased for just HKD 1,000 per sq ft.

In recent months, the decline in mainland visitor arrivals and retail sales has been narrowing, and we foresee an uptick in these figures in 2017. While improving sales has historically led to rising rents, luxury brands are likely to be visibly absent in the upcoming recovery. Without the participation of these high-margin retailers, any sharp rise in rents will be unlikely. Moreover, the recovery in mainland visitors may not enable an uplift to the same degree as in the past. Hong Kong Tourism Board data shows that the average per capita spending of mainland visitors has been declining since 2014.

Against this backdrop, it will be difficult for landlords to raise rents substantially over the near term and we expect rents to continue to decline a further 0-5 per cent in 2017. This might not be positive news for landlords and investors but shoppers can expect an even more diverse retail offering in the year ahead. With this in mind, Hong Kong’s position as a shopper’s paradise remains intact.


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