Why Hong Kong’s community malls are crucial to the future of the city’s retail sector
- Hong Kong’s community malls recently have performed far better than their larger counterparts as locals depend on them for their day to day needs
- Link Reit said that the occupancy of its Hong Kong retail assets stood at 97.7 per cent and rental collection at 98 per cent for the year ended March 2022
With Hong Kong holding the world record for the highest commercial density – one mall per square mile – it is no surprise that the range of shopping malls in the city is extraordinary.
Spanning everything from small arcades that locals rely on for their groceries and other daily needs to large complexes that supply retail opportunities to suit every wallet, they can sometimes double up as leisure and entertainment venues with cinemas and ice rinks, for example. As such a feature of Hong Kong life, residents have been flocking to malls for decades.
The advantages of Hong Kong’s local community malls are that they are part of their area – they are not situated in out-of-town locations that people need transport to access – and they stock items that people rely on to live no matter what the economic conditions are.
Government figures put the fall in the number of inbound travellers between 2019 and 2020 at over 90 per cent. Unsurprisingly, retail sales nosedived as a consequence. However, evidence also suggests that local consumers provided some respite, with their retail spending showing year-on-year growth since May 2020.
As a result of the loyalty and resilience of Hong Kong residents and their patronage of local community malls, these places have also risen up the list of less risky opportunities that investors look for during tumultuous times.
Though they have not been immune from Covid-19 restrictions, they are showing their resilience as an asset class and have become a viable anti-cyclical or defensive investment strategy for real-estate investors.
Before the 2019 protests and the Covid-19 outbreak, local and international investors were already looking at smaller malls and shopping centres in Hong Kong’s residential areas because of their solid rental yields and their potential for redevelopment and resale.
In fact, some institutions have been involved in a string of other transactions in recent years.
In December 2017, a joint venture between Pamfleet, a real estate investment fund, and Chelsfield, a UK property developer, bought Provident Square, one of the largest malls in North Point for HK$2 billion, with a view to rebranding and repositioning it following renovation and improving the tenant mix.
The good news about community malls in Hong Kong is continuing even in the midst of tough conditions.
Link Reit, the largest Reit in Asia, reported in June that occupancy of its Hong Kong retail assets reached 97.7 per cent with 4.8 per cent growth in rental reversion and 98 per cent rental collection in the year to March 2022. Link said that its results “showed that the Covid recovery was well under way”, with tenants’ sales growing 10.3 per cent and food and beverage sales rising 16.6 per cent. “[The] gradual relaxation of social distancing measures in May 2022 has been positive to the tenants/our business,” it added.
Others are aware of their appeal too: from early 2021 to mid-2022, developers and owners of community shopping malls have found investors interested in buying them. We believe the trend will continue in the second half of 2022. However, for high-occupancy community shopping malls, vendors and buyers have much different expectations.
While foreign institutional buyers are looking for yields of 4.5 per cent to 5 per cent because of the upwards pressure on interest rates, they have found that vendors are only willing to sell at the 4 per cent level.
Interestingly, however, the recent sale of a community mall in Tai Po achieved a yield of 3.8 per cent.
We remain sanguine for the remainder of 2022 and expect to see a swift rebound of the retail market. Consumers spending on necessities in community malls as part of their daily life continues to play a key role in that recovery.
With uncertainty over the resumption of unrestricted international travel and between Hong Kong and the mainland, retailers’ fortunes are tied to local consumers for now.
Dominic Chung is executive director of Asia capital markets and investment services at Colliers