Hong Kong sales rebound has retailers looking anew at expanding shopping space

Retail sales in Hong Kong are recovering strongly this year after a slump that began in 2016, as mainland Chinese visitors return to the city, spurring retailers to again think about investing in new premises.

In the first two months of this year, sales rose 15.7 per cent from the same period a year earlier, a stark contrast to what we saw through the majority of 2016 and parts of 2017, when retailers experienced sharp declines in their revenue, in some cases by up to 50 per cent as mainland tourists shunned the city and the central government cracked down on gift giving.

That decline meant the rents retailers could afford to pay to landlords in the prime shopping streets of Central and Causeway Bay corrected by between 40 per cent and 50 per cent.

The latest improvement still does not mean most retailers are approaching previous highs, but it is allowing them to make realistic predictions for their future business and thus invest.

We are seeing a great deal of interest from a variety of brands in expansion – luxury, affordable luxury and cosmetic brands are probably the most aggressive in the market at the moment. This will be a big relief not only to the brands and landlords, but also to the around 800,000 people who are employed in the retail industry in Hong Kong.

Assuming the growth trajectory continues, the overall market outlook is bullish, but there are some areas that remain a concern in the medium term, particularly secondary shopping streets where there are a large number of vacancies.

In the prime shopping spots of Central and Causeway Bay, the slump in 2016 and 2017 left many shops vacant, a very unusual situation for one of the world’s top shopping destinations. It has taken some time for the market to recover and reabsorb this excess stock.

In Central particularly there have been a huge number of changes. On Pedder Street we have seen Puyi Optical move in, whilst Omega moved their store from Queen’s Road Central to the former Hugo Boss space. Hermes relocated their flagship to Prince’s Building.

After more than 20 years with street-facing shops, Ferragamo and Max Mara moved to the IFC tower to be replaced by Harry Winston and Graff respectively. Mercedes Me moved their showroom 50 metres down the road to the former Omega space in Queen’s Road Central, while Folli Follie has relocated their shop to the space formerly occupied by Body Shop, which in turn moved further up the street.

This rotation of brands has meant that the majority of vacant shops have now become tenanted and proves that Central is still an attractive and profitable location for retailers. We have even seen new brands coming to the market, such as the Korean sportswear brand MLB and cosmetics retailer OMM.

But the situation in the secondary streets in Central is more concerning.

D’Aguilar Street, Wellington Street, Hollywood Road and On Lan Street, which were previously interesting and vibrant shopping streets, now have a large number of vacant shops along them. There are also a number of retailers who are looking to negotiate an early surrender of their leases, quoting poor sales performance, which will further add to the problem.

Whilst the foot traffic of these streets remains fairly constant due to the surrounding large office and residential populations, the conversion rate – an industry ratio used to assess performance – has dropped significantly.

For every 100 people passing on these streets the numbers who are actually shopping has decreased, leading to many retailers being unable to maintain their businesses. As more shops move out the problem can snowball as a smaller selection of shops decreases the appeal of the street and therefore less shoppers choose to spend their time and money there.

In the short term, this problem is going to persist. Whilst the majority of prime shops have been taken there are still some vacant. With the former Abercrombie & Fitch, Canali, Swatch, Pandora, Diesel, Mercedes Me and Hermes spaces still empty, retailers still have attractive prime options to consider for their expansion and will therefore not look to the secondary streets as alternatives.

Prime landlords are still being competitive with their rents and until this is no longer the case the secondary streets will remain subdued. Given the supply that needs to be reabsorbed into the market, we still see downward pressure in rents across the secondary market, but given the improvement in sales for prime spaces, rents will remain flat or increase slightly over the next 12 months.

In the medium to long term though, the outlook is looking much better for both landlords and retailers.

Assuming a continued growth in the overall retail market and a renewed interest in Central, the prime spaces will be mostly filled by the end of 2018, and then the wave of interest will start to reach the secondary streets.

As interest starts to improve and with a few new retail openings on the secondary streets, the area should very quickly forget its previous woes and will resume its status as an important destination for both local and tourist shoppers.

James Assersohn is director of retail Asia-Pacific at JLL.

In the medium- to long-term though, the outlook is looking much better for both landlords and retailers.

Assuming a continued growth in the overall retail market and a renewed interest in Central, the prime spaces will be mostly filled by the end of 2018 and then the wave of interest will start to reach the secondary streets. As interest starts to improve and with a few new retail openings on the secondary streets, the market should very quickly forget its previous woes and will resume its status as an important destination for both local and tourist shoppers.

James Assersohn is the local director of retail at JLL in Asia-Pacific.