Retail Rents Stabilised in a Market Still Adrift

• In an uneventful third quarter, retail rents continued to drift sideways, as both prime street shop and shopping centre rents continued to stabilize in Q3/2022 with minimal -0.3% and -0.4% year-on-year adjustments respectively
• Daily necessities operators, health-related trades and "retail-tainment" shops were highlights of the tenant profiles in the quarter
• Various strategies, such as subdividing space or being pet-friendly, were deployed in order to boost footfall and maintain occupancy
• Any turnaround next year will depend on the performance of the local economy, home prices and most importantly, China’s zero-COVID policy
• Even if Mainland tourists do return in numbers, slowing growth and housing market woes in China combined with a strong US Dollar/HK Dollar will mean that spending will be below previous levels.

Rents stabilised in Q3 while retail sales went flat in August

In an uneventful third quarter, retail rents continued to drift sideways and are expected to remain flat over the final quarter of the year. The release of another round of consumption vouchers should provide some support to domestic expenditure, though the effect is likely to be rather minimal as rising interest rates and volatility in the stock and housing markets continues to weigh on consumer sentiment.

Retail sales recorded a 4.1% YoY growth in July and were flat in August. Both prime street shop and shopping centre rents continued to stabilize in Q3 with minimal -0.3% and -0.4% year-on-year adjustments respectively, compared with a year-on-year growth of 1.7% and 0.4% respectively in Q2. By district, there was little variation among prime street shops with a very minor downturn in Tsim Sha Tsui while shopping centres saw a minor adjustment in Kowloon. 

Daily necessities, health-related trades and "retail-tainment" stand out in tenant profiles

As demand is still driven by locals, tenant profiles continue to reflect that fact and the trade and tenant mix remains bias towards daily necessities while health-related trades are also popular. Gyms and food and beverage in particular continue to look for expansion space, especially in residential areas. While the number of department stores and supermarkets appears saturated, smaller operators such as Bestmart 360 are still finding room to grow.

Another popular trend is ‘retail-tainment’ and we notice that a rock-climbing operator has leased the entire retail podium of One North, Yuen Long, while a 20,000-square feet skateboard park has also just opened in the Mills, Tsuen Wan. Children’s games centres are also in expansion mode. 

COVID policy and economic performance key to retail revival

Any turnaround next year will depend on the performance of the local economy, home prices and most importantly, China’s zero-COVID policy. Tourist numbers are unlikely to pick up until all restrictions on travellers are lifted as they have been elsewhere in the world. As pandemic measures continue to unwind across the Asia Pacific, the retail markets within the region are dividing into those which are recovering amid an influx of inbound tourism and subsequent boost to local economies, and those constrained by their reliance on domestic consumption.

Meanwhile, Mainland attitudes to the pandemic are not expected to change until at least after the Chinese New Year at the end of January 2023. Even if Mainland tourists do return in numbers, slowing growth and housing market woes in China combined with a strong US Dollar/HK Dollar will mean that spending will be below previous levels.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "The third quarter proved to be relatively uneventful with a continued reliance on domestic demand and growing concerns over higher interest rates, stock market volatility and slower growth."

Mr. Barrie Chan, Senior Director, Retail of Savills said: "For landlords of prime street shop units and shopping centres, the priority is occupancy rather than high rents and there is now a greater flexibility when it comes to tenant mix. We observed cases where larger retail spaces are being subdivided and have become multi-tenanted. In another strategy to attract footfall, more malls are becoming pet friendly in an attempt to win over this high-spending group."