How Hong Kong’s retail property sector is being pulled in two different directions

A leasing market driven by domestic consumption, and powered by F&B operators, is helping the city cope with its zero-Covid-induced isolation
However, landlords are betting on the return of luxury shoppers from the mainland, keeping the vacancy rate high

Nicholas Spiro

Published: 2:30pm, 22 Nov 2021

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It has been a while since Hong Kong, a city that has suffered a succession of major shocks over the past several years, took the top spot in an economic or industry forecast. That it should happen in the hard-hit retail sector, which has been dealt a series of crippling blows, is all the more remarkable.

In its midyear review published in August, CBRE predicted that high street rents in prime locations in Hong Kong would rise 5 per cent year on year this year, the strongest growth in the Asia-Pacific region, and a dramatic turnaround from the sharp fall in 2020.

To be sure, Hong Kong’s retail property market is still reeling from the damage incurred over the past several years. The pandemic-induced closure of the border with mainland China is just the latest, albeit the most severe, calamity to befall the sector.

Mainland visitors – who accounted for as much as 80 per cent of the city’s tourist arrivals before the virus struck – began tightening their purse strings some time ago.

According to data from CBRE, prime high street rents fell a staggering 40.7 per cent in the three years to the third quarter of this year.

04:10

Hong Kong retailers should create experiences for local shoppers to survive with ‘zero tourists’

The disappearance of mainland tourists has accelerated a shift away from luxury and premium brands targeting wealthier Chinese shoppers towards mid-to-mass market retailers catering to the city’s residents. One in five shops selling jewellery, cosmetics, clothing and leather goods have shut down since the third quarter of 2018, data from Midland IC&I shows.

The principal beneficiary of the “domestication” of Hong Kong’s retail market is the food and beverage (F&B) industry. As reported by the Post on November 4, restaurant receipts in the third quarter surged 43.8 per cent year on year, the sharpest increase on record.

The combination of the government’s HK$36 billion (US$4.6 billion) consumption voucher scheme aimed at boosting consumer spending and a draconian Covid-19 quarantine regime that has made it almost impossible for Hongkongers to take leisure trips abroad has turned the F&B sector into one of the main sources of leasing activity.

A report published by Savills last month noted that F&B operators are performing strongly across all price points, from fine dining to casual restaurants. Moreover, the sector’s prominent role in driving leasing volumes comes at a time when the pandemic has accelerated the push towards experiential retail.

Shopping centre landlords the world over are eager to introduce experience-oriented concepts to increase footfall and help counter the threat posed by online shopping. “F&B offerings help shopping centres differentiate themselves” said Barrie Chan, head of retail at Savills in Hong Kong.

Demand from F&B retailers, and the shift towards domestic consumption more broadly, are bound to intensify in the coming quarters.

People eat at a restaurant with Perspex shields between tables to comply with Hong Kong’s social distancing regulations on November 25, 2020. Photo: AFP

First, the “zero-Covid” policy doggedly pursued by Hong Kong and mainland China not only guarantees that the reopening of the mainland border will be gradual, it increases the risk that further outbreaks will lead to its suspension. Chinese shoppers will not return in droves any time soon.

Second, China’s luxury retail market has undergone profound changes since the pandemic erupted. The imposition of travel restrictions caused the share of luxury goods purchased in China to surge to 70-75 per cent last year, more than double the proportion in 2019.

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Even when mainland shoppers can travel overseas again, the repatriation trend will persist, partly due to increased online and omnichannel penetration rates, a report published by Bain & Company in December 2020 noted. This will further erode Hong Kong’s role as mainland consumers’ destination of choice for high-end purchases.

The problem, however, is that any meaningful recovery in Hong Kong’s retail sector requires an end to the untenable zero-Covid policy and the return of mainland tourists.

With Chinese shoppers accounting for as much as a third of the city’s retail sales before the pandemic, domestic consumption can only go so far in shoring up the leasing market, particularly in the prime shopping districts once frequented by wealthy mainland visitors.

Pedestrians walk past a Burberry store on Canton Road in Tsim Sha Tsui, Hong Kong, on July 8, 2019. Photo: Bloomberg

For a sector whose fortunes have been indelibly tied to sentiment among affluent Chinese consumers, there is some degree of denial among landlords with prime retail space about the forces reshaping the industry, and the speed of the rebound in rents once the border with the mainland reopens.

This explains why many owners refuse to adjust their rents sufficiently, causing the overall high street vacancy rate in core locations to rise last quarter despite the pickup in leasing activity.

Chan said “many landlords have strong holding power”, having purchased their shops decades ago at extremely low prices, allowing owners to remain profitable despite the sharp decline in their rental income.

Hong Kong’s retail property sector is being pulled in different directions. A leasing market driven by domestic consumption, and powered by F&B operators, is helping the city cope with its zero-Covid-induced isolation. Yet, many landlords are betting on a tourist-led recovery in premium and luxury retail, keeping vacancy rates high.

Just as the former is not strong enough to create the conditions for a sustainable recovery, the latter could take a lot longer, and prove weaker, than anticipated.

Nicholas Spiro is a partner at Lauressa Advisory