Hong Kong retail property sector seen bucking the downtrend

Street shop rentals in traditional shopping districts projected to rise 12% in the next twelve months.

With the recent Eurozone sovereign debt crisis rattling investor confidence and sentiment, the residential, office and industrial property markets in Hong Kong are anticipating a downward trend save for the local retail market which is projecting a 12% increase in retail property rental over the next twelve months.

The positive outlook is strongly linked to the rising number of inbound visitors, in particular the strong inflow of Mainland Chinese visitors, and growing retail sales with the total value up 29% year-on-year (YoY) in 3Q 2011. As a result of the expanded Individual Visit Scheme policy, visitor arrivals to Hong Kong rose 18.8% YoY to a total of 10.9 million for the three-month period ending 31 August 2011. Meanwhile, visitor arrivals from Mainland China registered a 26.4% increase YoY.

This encouraging influx of visitors is clearly generating much interest among international retailers who remained aggressive in securing retail premises at prime spots. “With the current shaky economic conditions in the West, many international retailers see Asia as their safety net and are eager to grab a piece of the lucrative retail pie. To some, Hong Kong remains the gateway to the ever-growing Mainland China market,” said Simon Lo, Executive Director of Research & Advisory, Asia at Colliers International.

According to Lo, the strong leasing demand by international retailers are causing landlords to stand firm in rental negotiations. “Retail rentals are expected to grow further, albeit at a slower rate. The average retail rent of street shops in the four traditional shopping districts (Central, Causeway Bay, Tsim Sha Tsui and Mong Kok) increased 4.2% quarter-on-quarter (QoQ) in 3Q 2011, which is milder than the 7.4% QoQ growth in 2Q 2011,” he said.

Besides international retailers, local jewellery entrepreneurs are also part of the mix in the rush for prime retail space. Bolstered by strong buying interest from Mainland China visitors, sales of jewellery, watches, clocks and valuable gifts recorded robust growth of 51.8% YoY to HK$7.84 billion as of the end of July 2011. This explains why local jewellery entrepreneurs are the exception amongst local and smaller retailers, who are under pressure to move out of the prime locations due to vigorous competition with international brands and skyrocketing rentals.

Compared to the leasing market, the sales market was much quieter. “Buying sentiment was subdued due to increasing difficulties in securing financing and concern over the turbulent global economy. With a majority of investors adopting a wait-and-see attitude, the number of sales transactions with lump sum considerations of HK$10 million or above in the four traditional shopping districts notably fell 47%QoQ in 3Q 2011,” adds Lo.
Meanwhile, some investors were seen shifting their attention to non-traditional markets such as Sheung Wan and the Western district due to lack of buying options and soaring prices in the core areas.

Looking forward, with the sustained local economic growth, increasing number of inbound visitors, rising inflation, positive growth in retail sales and limited supply of shops at prime locations, retail rental in core areas are anticipated to see an upward trend. However, taking into account the possible downside due to the weakening global economy, the average street shop rent in the four traditional shopping districts is projected to increase at a slower rate of 12% in the next 12 months as compared to this year.