CONCRETE ANALYSIS
Concrete Analysis
by

Hong Kong’s status as retail hub safe for now

While slowing sales have raised concerns, the city is well ahead of Asian rivals in attracting global brands, with mid-tier labels plotting expansion

PUBLISHED : Tuesday, 15 July, 2014, 2:50pm
UPDATED : Wednesday, 16 July, 2014, 2:08am

Recent market signals have been a wake-up call for some international brands in Hong Kong: total retail sales declined by 0.2 per cent year on year in the first five months of this year, with jewellery and watches, sales of which fell 20.6 per cent, bearing the brunt of the slowdown.

The slowdown in visitor spending, along with pressure on the government to limit the number of visitors from the mainland, have further raised concerns among retailers, especially since mainland tourists contributed about a third of total retail sales in recent years.

Is the picture really that gloomy? Probably not.

A recent survey of more than 100 international and luxury brands by JLL shows that Hong Kong still ranks as the most attractive retail destination for international retailers in the Asia-Pacific, with more global brands choosing to open their flagship stores in Hong Kong than any other location in the region, despite the city's deserved reputation for eye-watering rents.

For example, last year, 40 new brands, including desirable international labels such as Philipp Plein, opened stores in Hong Kong.

The headwinds may put landlords under pressure to reduce or maintain rents

It comes as not much of a surprise that Hong Kong is miles ahead of rival Asian cities in housing international brands, and that the city has the greatest presence of international retailers in the region.

The underlying fact is that international brands still view Hong Kong as a stepping stone to the growing mainland market, while mainland brands also want to test their growth plans in Hong Kong before pushing for global expansion.

Meanwhile, Hong Kong's appeal as a shopping paradise remains intact.

A low-tax environment that makes products more affordable, a dynamic market that offers a wide range of choices from luxury to fast fashion, close proximity to mainland China and a highly efficient infrastructure network that allows travel with ease - this unique combination will continue to attract high-spending locals and visitors and therefore gives a boost to retailers' confidence in being able to generate desirable returns on investment in the city.

However, while the market fundamentals are expected to remain strong, the reality is that we probably won't see the same influx of new brands into the city on a scale as large as we have seen in the past few years.

Down the road, any official moves to reduce mainland tourist numbers, the continued burden of high rental costs (which leads to tighter margins), the prospect of weaker-than-expected sales growth, and a shift in the spending patterns of visitors from the mainland may all have a knock-on effect on the retail market and, consequently, on the expansion plans of retailers.

Amid the seemingly sluggish market sentiment, we have noticed fewer brands in the luxury sector expanding in the first half of the year.

In the meantime, some luxury retail brands are starting to take a more pragmatic approach in leasing negotiations, resulting in a slowdown in rental growth.

JLL research shows rents of high-street shops edged up by just 0.2 per cent in the second quarter from the previous quarter, compared with 0.5 per cent in the first quarter.

Despite the headwinds in the market, we have observed that mid-tier brands have outperformed luxury brands in pressing ahead with their expansion plans since last year.

Among the 40 new-to-market brands last year, over 90 per cent are mid-tier brands, including J. Crew, Intimissimi, Topshop and Superga, brands that are mainly from the US, Italy and Britain.

Meanwhile, some fast-fashion brands and cosmetics retailers from South Korea and Japan are actively expanding their footprint in the city.

Esprit recently preleased three floors (17,944 square feet) of the Wings Building in Central for about HK$2 million per month, and Sulwhasoo opted for a 9,400 sq ft space at Silvercord in Tsim Sha Tsui for about HK$2.9 million per month.

These mid-tier brands are expected to continue to thrive and benefit from a basket of market factors - including a growing Asian middle class projected to nearly double by 2020 to 1.32 billion, sophisticated consumers who are opting for more mid-priced products or affordable luxury, and a positive local consumer market underpinned by an extremely low unemployment rate, which reached a 16-year low of just of 3.1 per cent for March to May.

While the headwinds may put landlords under pressure to reduce or maintain rents at current levels, brands may find leasing negotiations in their favour and can therefore operate and expand their businesses at lower cost. This is especially important for cost-sensitive retail tenants, including some mass-market or mid-tier brands.

Looking ahead, the outlook for the retail sector remains positive, especially when it comes to local spending and the expansion of mid-tier brands.

How potential hiccups such as restrictions on the number of mainland visitors may affect the market remains to be seen, but we are optimistic that Hong Kong's long-held reputation as a shoppers' paradise and a favourite destination for retailers will not change for the foreseeable future.

Tom Gaffney is head of retail at JLL Hong Kong