Retail vacancies in Hong Kong soaring, but rents dip only slightly

PUBLISHED : Saturday, 26 July, 2014, 1:38am
UPDATED : Saturday, 26 July, 2014, 1:38am

Vacancy rates for retail outlets, at their highest in three years in four shopping districts, will head higher still by early next year, but not enough to bring down rents by more than a modest amount, analysts say.

Research by consultancy Cushman & Wakefield shows 128 shops in Causeway Bay vacant this month, up 56 per cent from 81 in December.

"The vacancy rate in Causeway Bay is the highest since the outbreak of severe acute respiratory syndrome in 2003," said Michele Woo, the firm's executive director for retail.

Vacant shops in Tsim Sha Tsui, another popular shopping district, have nearly doubled from 44 to 93 during the same period. Vacancies in Mong Kok have surged 129 per cent to 48, and those in Central have jumped 62 per cent to 76.

The vacancies in shopping districts are mainly in second and third-tier shopping streets, as the vacancy rate in first-tier streets remains low.

"But it is only a beginning," Wu said. "Unless there is a new policy to stimulate retail sales, the situation will become even worse after Lunar New Year in 2015."

While the retail market was booming and rents in first-tier shopping streets stayed high, Wu said, retailers would rent shops in second-tier streets at a higher rent in order
to have a presence in the key shopping streets.

But now, they would rather open shops in new shopping districts if the returns in second-tier streets cannot justify the expensive rents.

"Although the landlords in second-tier streets have begun to cut their asking rents, it's too late. Many retailers are losing interest," Wu said.

The increasing vacancy rate is a result of falling retail sales. Census and Statistics Department data shows retail sales dropped 4.1 per cent year on year in May, the third consecutive month in which they fell.

Luxury watch and jewellery retailers used to be the most aggressive in expanding in shopping districts and were willing to pay a premium to rent a shop in prime shopping streets.

However, following a change in the shopping habits of mainland visitors, sales of watches and jewellery plunged 24.5 per cent year on year in May.

"It hit the business of local luxury watch and jewellery retailers the most," said Jeannette Chan, regional director for retail at consultancy JLL. "They are not as aggressive in expansion as before. It left only affordable international luxury brands to remain active in seeking new shops."

Higher vacancy rates and slumping retail sales have resulted in a drop in overall retail rents in shopping streets, but the decline has been mild.

Data from Cushman & Wakefield shows the average monthly rent in Causeway Bay's main shopping streets dropped 1.6 per cent quarter on quarter to HK$1,800 per square foot in the second quarter. Rents in Tsim Sha Tsui fell just 0.7 per cent.

"Shop owners in second-tier shopping streets began to cut their asking rents in recent months," said Joe Lin, a senior director of retail services at CBRE. "But tenants have turned cautious in leasing already. The shops are still unable to find tenants. So we didn't see a significant fall in rents."

However, CBRE has revised its forecast for rents. "We expect the rent in second-tier streets will drop 15 per cent this year, compared with our old forecast of 10 per cent," Lin said.

Since many international brands are still looking for shops in first-tier locations, rents in those streets would be flat.