Retail Rents Unchanged As Weak Conditions Persist At Year End

• Despite attempts by landlords to lease up empty units before Christmas and Chinese New Year, activity levels have remained stubbornly low in Q4/2022
• Relative to street shops, shopping malls are faring a bit better and most report high occupancy as landlords have diligently focused on lease-up rates rather than rents this year
• Luxury retailers are focusing on shopping malls rather than the high street, and we note a shift away from traditional mainstream luxury towards fresher concepts under the influence of the younger generation
• Given the economic uncertainties and ongoing COVID restrictions, retailers and travellers are not expected to flood back to the city in the short term
• We see little to suggest a major turnaround in 2023 and we think that rents will remain largely flat and expect a 0% to 5% rise over next year as a whole.

A lacklustre market as retail sales drop

Restricted by the social distancing measures and without the spending from inbound tourists, Q4/2022 saw little change in market tone from Q3. With the household disposable incomes under strain, retail sales by value dropped by 0.7% YoY over the first ten months, among which spending on clothing and footwear and department stores declined by 9.6% and 9.3% YoY respectively. In some positive news, the F&B sector finally experienced a slight rebound in the third quarter, and the value of restaurant receipts rose by 9.3% QoQ, mainly due to the resumption of banqueting and family dinner gatherings in Q3. 

Street shops see little activity

In the face of higher vacancy rates especially on most major streets including Russell Street, Canton Road and Sai Yeung Choi Street, landlords have been trying to lease up empty units before Christmas and Chinese New Year, but activity levels have remained stubbornly low. The lifting of some travel restrictions in Hong Kong has done nothing to revive tourism to any extent and even demand from F&B tenants, for so long the mainstay of the market, has reached saturation. 

Younger generation spending and new PRC brand entrants are trends to watch

For luxury retailers the focus is on shopping malls rather than the high street and as the younger generation become a greater force in the retail market, we note a shift away from traditional mainstream luxury towards fresher concepts and more affordable offerings. Looking ahead, we see early signs of demand from PRC brands who have not yet entered the local retail scene and in this respect, the Li Ning flagship store letting on Canton Road is significant. Li Ning is a major mainland sports brand named after the gymnast and entrepreneur who founded the company.

Retailers eye reopening opportunities

With hopes dashed early on in the year by the fifth wave of the pandemic, rents have ended 2022 largely flat even though a small number of landlords have recently used the possibility of border reopening with the Mainland to make minor increases. The British brand Fortnum & Mason's new outlet at Hong Kong International Airport, as well as New World's 3.8 million square feet 11 SKIES to be opened from 2023 to 2025 in phases, stood out among the quiet leasing market in Q4. 

Freer border may boost rental growth in 2023 by 5% at most

Looking ahead to next year, a freer border will initially unlock demand from families keen to visit relatives in China and business travellers. Tourists will return first from Southern China, and this is typically driven by day tripper demand for convenience goods within easy reach of the border. However, given the outdoor mask-free policies and relaxed PCR test requirements in some of our neighbouring countries, we do not expect retailers and travellers to flood back to the city in the short term. We therefore see little to suggest a major turnaround in 2023 and we think that rents will remain largely flat and expect a 0% to 5% rise at most.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "We expect a muted recovery in 2023 as the market faces on-going COVID restrictions, a strong Dollar, higher interest rates and softer residential prices."

Mr. Barrie Chan, Senior Director, Retail of Savills said: "Relative to street shops, shopping malls fared better in the last quarter and most report high occupancy as landlords have diligently focused on lease-up rates rather than rents this year."