RETAIL OUTLOOK the wake of their departure. Experts warn that the trend of declining luxury retail sales is unlikely to reverse in the near future. Joanne Lee, senior manager of Hong Kong research & advisory at Colliers, notes that China is not likely to ease its austerity drive in 2016, which will keep a lid on Hong Kong’s luxury retail sales. “Apart from structural changes in mainland-consumer behaviour, weaker inbound tourism and slowing economy in Hong Kong are also to blame for the gloomy retail sector. Stability in the labour market and consistently low unemployment, which backs the growth of local consumption, will help counter the negative external factors. However Hong Kong, being a small economy, has always been reliant on external factors. It is unable to boost the retail industry and economy by local consumption alone. Hong Kong’s economic growth is set to slow and retail sales are expected to post a single-digit decline next year,” Lee says. The new normal Persistently low luxury sales have led to headline-grabbing shop closures by major brands. In September, US-based leatherbag maker Coach, closed its flagship store on Queen’s Road Central, two years before its lease is due to expire in October 2017. Such high-profile store closures have pushed landlords to cut aggressively cut rents. This is the case with Emperor International Holdings, which has agreed to slash rents for five retail premises in Causeway Bay by up to 40%. CBRE’s Lin notes that the retail market has reached a turning point—luxury brands will no longer dominate the market. More mid-market retailers will snap up spaces vacated by luxury retailers in core locations, and this trend is set to continue in coming years. “In the past few months we have observed a number of cases of mid-market retailers taking
up spaces made vacant by luxury retailers, such as multi-brand cosmetic retailers taking over shops previously occupied by luxury watch brands,” Lin says. Meanwhile, Lee adds that the softening retail-leasing market is encouraging the gradual return of mass-market retailers and midrange brands to prime shopping districts. While this is negative for landlords, this is good news for local consumers. “Some mass-market retail chains, for example high-street fashion and affordable-cosmetics brands, are taking advantage of the current market slowdown to move back in and take up new leases. As luxury brand retailers consolidate business, we will see a change in the landscape of shopping streets and that is good for the retail sector, by means of a healthier tenant mix with different kinds of tenants, not just watches and jewelry stores,” Lee says. In order to cope with dropping sales, Ji notes that some prime retailers have chosen to relocate to shopping malls rather than keep their street-front shops. Ji expects luxury rents to continue dropping in 2016, with street-front shops expected to decline by 10-15% next year. In contrast prime shopping mall rents will stay resilient and are even forecasted to increase by 2-3%, as there is no new supply coming into the market while demand remains buoyant. “Mall rents should hold steady because there is no new supply coming into the market, while some retailers are looking to consolidate their stores into shopping centres. This is why prime shopping mall rents are forecasted to increase by 2-3% in 2016. So here we can see a divergence between retail rents,” Ji says. A silver lining Despite the sector’s troubled outlook, there are still pockets of hope to be found in Hong Kong’s retail scene. Strong domestic and tourist demand for mass-market products will keep sales buoyant in 2016. “Mass-market retail sales
David Ji
Joanne Lee
Joe Lin
have been supported by local and tourist spending. Tourists are buying affordable items such as fast fashion, sportswear and cosmetics goods. Local consumption has remained strong due to a steady economy and low unemployment rate,” says Lin. “We expect the rental downcycle will continue for the next 2 years, but given a lower base of comparison, the pace of decline is expected to decelerate. In terms of retail property transactions, the weak retail market sentiment will continue to curb sales of retail properties,” Lin adds. Lee says that regardless of the depressing retail sector, shopping malls and stores that sell mass market goods are unlikely to be adversely affected by falling Chinese tourist arrivals and structural changes in consumption patterns. “The local retail market remains supported by the healthy spending of domestic Hong Kong shoppers. Rents in malls, those of which are not heavily exposed to luxury brands will stay resilient,” Lee says. The fact that retailers are will be able to adapt to changing consumption patterns provides hope for Hong Kong’s shifting retail market, says Ji. “This trend is not going to reverse any time soon. The Chinese anti-corruption drive will continue and the economy will remain subdued, which will continue to dampen luxury retail spending. Although the retail outlook will be subdued, there is still a glimmer of hope, as retailers will be able to adapt to this situation,” Ji says.
Valuie of HOng Kong Retail Sales (by type of outlet)
Source: Census and Statistics Department, KHSAR Government
HONG KONG BUSINESS ANNUAL 2016 17