Innovation is key to the changing world of Hong Kong retail

Hong Kong has one of the most vibrant retail markets in the world. While it has certainly evolved over the years, the city has traditionally been regarded as a ‘shopping paradise’.

However, more recently, indicators suggest that the decade-long luxury shopping era is coming to an end: vacancies are becoming more common in retail properties and, left with little choice, landlords are lowering rents and having to scramble to find suitable tenants.

In fact, during 2016, rents for street-level stores in major shopping districts dropped by 11.5 per cent – on the back of an even more dramatic 17 per cent drop the previous year.

In aggregate, the decrease in retail rents stands at around 30 per cent over the past two years, and even this figure is an average. Certain areas more sensitive to the decline in spending by mainland Chinese visitors have seen rents drop by over 50 per cent from the peak.

Much has already been said and written about the ‘new normal’ in the local retail industry, and I don’t plan to repeat those observations here.

One trend that has received less public attention, however, is the use of revitalised industrial buildings for retail, predominantly by F&B tenants as well as a whole host of other purposes such as co-working spaces, gym, and even the new concepts – edutainment/retailtainment.

Five or six years ago, nobody would have predicted this. When the downtown rents were sky-high and local retail businesses were being squeezed out, many observers expected most of them would simply go under.

What instead happened – which again reflects the dynamic nature of the local retail sector – is that they relocated to areas that were traditionally seen as industrial/office zones and were revitalised by the landlords, to make it a retail and F&B building, to capture higher potential rental yield areas such as Lai Chi Kok, Kwun Tong, and Kwai Chung gradually started to reinvent themselves.

After careful planning and revitalisation, these former industrial buildings command rents of between $10-20 per square foot to $20-30 per square foot.

I visited one of these buildings with my family on a weekend recently, and was surprised by the level of congestion – there seemed to be even more shoppers there than even the larger, better-known shopping malls. The tenants in the building I visited were exactly the type of small local businesses being pushed out of traditional shopping areas when rents were at their dizzying peak. In their new incarnations, many have survived and prospered.

Areas such as Lai Chi Kok, Kwun Tong, and Kwai Chung gradually started to reinvent themselves.

I believe the use of revitalised industrial buildings has been a real success. During the week, economic activity is generated and supported by the local population of working age, while at weekends, flea markets and themed carnivals take place, bringing in shoppers who are bored of chain stores.

Demand for this kind of revitalised space is high, in stark contrast to the large amount of vacant retail properties in well-known shopping districts like Causeway Bay.

All in all, the retail market in Hong Kong has expanded. In addition to the four major shopping districts and emerging shopping malls in the New Territories, many retailers now extend their reach to former industrial zones. This is the positive side effect of “Retail’s Golden Decade”, the sky-high rent squeezed out those domestic retail & F&B operators, and they started their business in these new zones to form a fresh & novel scenario. The restaurants are mostly decently decorated with a feel of SOHO or Lan Kwai Fong, but now in Lai Chi Kok or Kwun Tong, they even have nice terrace for open seating.

With luxury retail subdued, landlords in the central areas will need to innovate and enrich their offering to hold on to their tenants. Building more identikit shopping malls is no longer enough.

Joe Lin is an executive director for advisory and transaction services for retail at CBRE Hong Kong