After being mired in a slump for the better part of the past three years, we are starting to see light at the end of the tunnel for Hong Kong’s retail sector. Fuelled by the growing numbers of mainland Chinese visitors, the inbound tourism market has turned the corner with visitor arrivals up 2.4 per cent y-o-y in the first half of 2017. The decline in retail sales, meanwhile, has further narrowed and was down just 0.1per cent y-o-y over the same period. Given these positive signals, Hong Kong’s retail market seems poised for a recovery.

Tourist spending is having less of an impact on retail sales than previously

Strolling around retail hotspots such as Causeway Bay, the streets look quite different from before. Shops that were previously occupied by luxury brands have given way to more mass market retailers. This transformation has been driven in part by the changing behaviour of shoppers, especially those from the mainland. Over the past three years, their spending has not only moved away from luxury goods but they are also spending less, with per capita spending on shopping declining from HKD 4,012 (US$518) in 2014 to HKD 3,175 (US$410) in 2016 (Figure 1).

Figure 1: Shopping spending of mainland Chinese visitors
Source: Hong Kong Tourism Board

This decline is expected to continue in the near future driven by a myriad of factors, including the stricter tax policy on foreign purchases and the narrowing price gap between domestic and international markets. Moreover, mainland tourists are now focusing less on shopping and more on dining and experiential activities during overseas trips. This can partly explain why the increase in tourist arrivals in the year-to-date has yet to be reflected in retail sales figures.

Wave of lease expiries to continue to exert downward pressure on rents

Retailers in Hong Kong usually commit to standard three-year lease terms. Given that high street shop rents peaked in the third quarter of 2014 (Figure 2), lease expiries coming up in the second half of the year will likely be from retailers that committed to leases when rents were at the peak of the market. With the changes in the challenges experienced by retailers over the past few years, these retailers will be asking for significant rental cuts. Against this backdrop, the downward pressure on rents will remain strong over the near term.

Figures 2: Retail rental index (4Q00=100)

Source: JLL

Market recovery is being underpinned by F&B and mass market brands

The correction in rents has attracted the interest of international brands to expand their footprint into the city, F&B operators forming over 60 per cent of the new market entrants in 2017. As a foodie, I am thrilled with new openings. But for landlords, this is probably not as exciting. Unlike their luxury counterparts, F&B tenants generally operate on tighter rental budgets. Without the presence of high-margin luxury retailers in the market, any substantial rise in rents will be unlikely.

Against this backdrop, we anticipate that high street rents are likely to decline a further 5-10 per cent in the second half of 2017. Still, as rental concessions get thinner, we expect to see the bottom very soon.

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