Prime street shop rents tumbled 15.4% in Q3 as vacancies mount

Retailers are “running out of money” and expired leases were not being renewed.

Prime street shop rentals fell 15.4% QoQ in Q3, bringing the overall year-to-date (YTD) decline to 16.4%, reported Savills Hong Kong. Shopping centre rental charges also slipped 14.2% QoQ.

Retail sectors most traditionally popular with mainland Chinese tourists have been most affected with sales of jewelry and watches plummeting 47.4% YoY, according to data from the Census and Statistics Department. Other sectors popular with mainland tourists such as clothing, footwear and allied products, as well as cosmetics and medicines, also fell 32.1% YoY and 30% YoY, respectively.

Also read: August retail sales plunge in worst performance on record since 1998

As a result, luxury retailers reported that their revenues were more than halved during this period, noted Savills.

“The retail sector has borne the brunt of the corrosive effects of the trade war and the damaging impact of the social unrest on visitor numbers,” said Savills Hong Kong.

Vacancies mount as more retailers run out of money and choosing to surrender or not renew their leases, they added.

This has resulted in landlords offering short-term and ad hoc relief in the form of 15-20% rental reductions for three months or longer.

Amongst prime street retail areas, Causeway Bay was the hardest-hit district as major malls and department stores have all been closed for periods. Rents diminished 17.5% QoQ in the third quarter alone, bringing the sector’s YTD decline to 18.4% in 2019.

Also read: Greater Central office rents to fall by up to 8% in 2019

Rents in Tsim Shui Tai and Mong Kok both shrunk 15% QoQ and brought their individual YTD declines to 15%. Central rents also fell 13.9% QoQ, bringing the YTD decline to 17.1%.

Shopping centres in the New Territories weakened considerably with a 16.4% rental decline in the third quarter, bringing its YTD to 16.4%. Compared to prime streets, mall rents are traditionally more resilient during difficult times, said Savills.

However, unlike prime street landlords, mall landlords are “less forgiving” and are tending to wait and see, the report noted. At Pacific Place, Swire has proved the exception, offering 10-30% reductions on a case-by-case basis.

Also read: Mall rents slashed by up to 25%

Simon Smith, senior director of research for Asia Pacific at Savills Hong Kong, shared a gloomy outlook for the near term. “ It is difficult to see any upside at this point, with poor macroeconomic conditions compounded by social unrest undermining Hong Kong’s traditional role as a retail hub in Asia,” he said.

Some areas, such as Sheung Shui, were less impacted and continued to see mainland visitors. Sales in the area are ‘only’ down 10-20%, noted Savills. More locally-orientated centres in Tseung Kwan O are also bearing up whilst local restaurants are proving relatively immune.

In contrast, some luxury brands are expected to enjoy a record 2019 in mainland China as sales were boosted as a result of the lower taxes, a weaker Renminbi and more choice of products.

Looking ahead, Savills believes that Hong Kong will remain a key market for retailers in the region. “[Hong Kong] is expected to remain a key market for retailers in the region and that whilst the trade war has undermined local and overseas consumption, the local residential market has remained relatively resilient and interest rates remain low,” the report read.

As for the topic of tourism, Savills expects that if things return to normal, the return of daytrippers who make up 60% of visitors in Hong Kong and Macau to greatly boost the retail market. This could potentially help the retail market bounce back “quite quickly.”

Meanwhile, visitors from Western and Northern China (the ‘overnights’) may take longer to return, possibly 12 to 18 months, as more negative perceptions of Hong Kong are likely to linger, noted Savills.