Hong Kong’s retail spending has been softening and a negative impact is being felt in the leasing market of related properties.
Retail spending in Hong Kong continued to fall in March, dropping 1.3 percent year on year, after a 2.2 percent decline in February. While the anti-corruption campaign on the mainland heated up, the sale of luxury goods in Hong Kong fell 8.9 percent in March.
Slowing sales and rising costs (in rents and headcount) have reduced the productivity, profits and rental affordability of retailers, real estate service provider Savills said in a report. Demand has also transferred from high rent payers like the super-luxury watch segment to the pharmaceutical trade and mid-market cosmetics and apparel retailers, which has affected overall rental affordability in the market.
Overall, prime street shop rents in the traditional shopping districts fell by 0.6 percent over the fourth quarter of 2013. The fall was bigger in Central (3.1 percent) and Causeway Bay (2.2 percent), due to higher vacancies. Mong Kok, a popular mid-market location, was the exception, with rental growth of 1.8 percent.
The gap in rental expectations has resulted in vacancies in second- and third-tier streets, as well as some first-tier locations.
Slowing take-up, early surrenders and increasing vacancy in the street shop segment are starting to test landlords’ patience and financial strength. More landlords are now willing to renew leases with existing tenants or extend leases rather than seek higher rents from new tenants.
Savills is concerned about the homogenization of Hong Kong’s tourism industry, which might adversely affect the retail market. Mainland tourists represented 75 percent of all tourist arrivals in 2013. No other city is that dependent on mainland travellers. In Singapore, for example, mainlanders represented 14 percent of visitors in 2012. In New York, this segment was fewer than 5 percent, Paris around 2 percent, and London only 1 percent.
On the positive front, Savills noticed strong leasing interest from mid-tier international retailers, some of them newcomers, with small to medium space requirements, who prefer shopping centres and favour professional management and better trade mixes.
“While high-street rents are beginning to soften, we can expect further rises in shopping malls this year,” research and consultancy head Simon Smith said.
Savills projects that street shop rents will continue to drift down for the rest of this year. But, growth in rents in the shopping center segment could be sustained, with some headroom at a number of popular malls.
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