A sharp increase in the number of mainland visitors has given the sector a big boost The retail property leasing market has received a shot in the arm as the increase in mainland tourists puts Hong Kong shop owners in an upbeat mood. Bryn Davies, director of retail sales for greater China at CB Richard Ellis, says market sentiment is good and the retail market had seen a 20 to 30 per cent increase in sales in recent months. The signing of the Closer Economic Partnership Arrangement and the relaxation of travel restrictions for mainland residents to visit Hong Kong has sparked a revival in market sentiment. With the atmosphere turning more positive, the government has implemented a number of tourism promotion campaigns, further boosting the feel-good factor in Hong Kong. 'Most of the people I talked to are bullish about the retail market at the moment,' Mr Davies says. In addition to the increase of mainland visitors in the past two to three months, the return to outdoor living for Hong Kong residents after Sars and recent signs of recovery in the stock market and housing transactions have improved the market atmosphere, he says. According to CB Richard Ellis, leasing activity for shops during the third quarter was largely driven by expansion and relocation activities from a variety of businesses, in particular food and beverages operators, beauty salons and cosmetic retailers. However, Mr Davies says there are concerns about the retail property leasing market in view of negative factors such as deflation and high unemployment. 'People are selective in taking new spaces, and their decisions are still strategic,' he says. For example, Prada's commitment to a 9,000 square-feet flagship outlet in Alexandra House in Central was a reflection of its confidence in Hong Kong's status as a regional market. Dickson Concepts' commitment to open a 60,000 sqft Harvey Nichols store in The Landmark in 2005 was a plan to tap long-term growth prospects rather than short-term gains. CB Richard Ellis reports that retail rents for leading shopping districts recorded a slight rise of 0.6 per cent in the third quarter from the previous quarter on the back of improved economic conditions. Retailers are generally taking a more positive view of their business prospects, while overall inquiries for retail space have increased. Most retailers have resumed expansion plans that were put on hold during the Sars outbreak while continuing to increase their retail presence in prime locations. Mr Davies says food and beverages and personal care shops have been active recently, but chain store fashion brands remain fairly quiet. 'The underlying trend suggests there is still pressure on the retail market. People are very selective in what they require.' One the positive side, there have been some good developments in the market in recent months, including increased leasing activities at Two International Finance Centre in Central. Hysan Development's newly renovated Caroline Centre in Causeway Bay offers retailers high-quality space. Hysan has renamed the property Lee Gardens Two to attract upmarket retailers. 'Demand in prime locations never diminished, and rents are expected to maintain in the fourth quarter and possibly increase next year, provided no external impact affects the market,' Mr Davies says. 'We are seeing signs that retailers not yet in Hong Kong have started to review the market after their plans had been put on hold during the Sars period.' Two or three years ago, more retailers moved to decentralised areas, but the trend is changing. The market in decentralised areas is becoming less active while retailers are more selective and concentrate on properties in core areas. 'Next year, the market will depend on external factors. If Sars stays away, the market will be gathering momentum. 'Overseas and local retailers will be more optimistic about business,' Mr Davies says. Developers or landlords have to upgrade their retail properties or shopping centres to accommodate the increasingly demanding requirements of retailers. 'The recovery of the retail market depends not only on market performance but also on how landlords respond to market demand,' Mr Davies says. 'Landlords have to find ways to make their properties more attractive, by redeveloping or making changes to their property to accommodate new needs. They will have to do more promotion to stay competitive.'