October 19, 2012
Waning retail sales growth - predicated by reduced spending from mainland Chinese visitors - could see the rental market suffer a sharp correction, said market analysts.
Slowing retail sales growth warn of a sharp correction for the Hong Kong retail rental market, as increasing reluctance to splurge among mainland Chinese shoppers threaten to force more shops to move out from traditional prime shopping hotspots and into non-core areas.
Analysts said that although rents in the traditional core shopping districts such as Central, Causeway Bay, Tsim Sha Tsui and Mong Kok are still holding firm, the market is mere months away from seeing a decline.
"Usually, there is a two-month gap between retail rent and retail sales. That means rent only reflects retail sales two months earlier," former University of Hong Kong associate professor Edward Yiu Chung-yim said. "When sales slow down, rent growth will narrow accordingly."
In August, total retail sales value fell 1.92% from July to HKD 35.8 billion. However the market still managed a 4.5% growth year-on-year.
City University management professor Chan Yan-chong said that means store tenants will negotiate with landlords on cutting rents. "Retail sales are no longer flourishing, so landlords would yield a little bit," he said.
Compounding the situation is the dismal showing of the recent "Golden Week", which may have been the worst since 2004's launch of the Individual Visit Scheme. Caroline Mak, chairwoman of the Hong Kong Retail Management Association said, "The local retail sector is at risk of a hard landing."
The recent Golden Week saw higher numbers of mainland Chinese visitors, but spending was lower than last year. During this year's eight-day holiday and shopping period, the Tourism Board counted 960,000 mainland visitors, a 20% increase from last year. However, sales in North District fell by between 20% to 30%, said Mak.
Market watchers believe that rental growth will cool in response to the corresponding slump in luxury retail sales, especially among up-scale shopping centres on first-tier shopping streets anchored by big brands.
DTZ Debenham Tie Leung senior director Alvin Yip Kwok-ping said, "With the support of the low- interest-rate environment, and the limited supply, prices of shops on first-tier streets won't drop, but property owners may slow down the increase in rents due to reduced effect from Individual Visit Scheme tourists."
Feeling the pinch, retailers are beginning to relocate to less expensive sites to save on business costs. "Some major retailers shifted their attention to noncore districts, taking advantage of increased shopper flow in these more cost-effective locations," noted a Knight Frank report.
Among retailers shifting their focus to noncore areas are secondhand luxury bag retailer Milan Station and French fashion brand agnes b. The latter has more than doubled its original 2,500 sq ft store in New Town Plaza, Sha Tin to 7,000 sq ft, making that its second flagship store in the country after its IFC mall outlet.
David Hui, senior regional sales director of Centaline Commercial's New Territories retail department, said, "Although the market focus has always been on core districts like Tsim Sha Tsui and Causeway Bay, the substantial potential carried by retail properties in New Territories shall not be ignored."
However, Jones Lang LaSalle notes that retailers are not abandoning core shopping streets en masse.
"Retailers of some luxury brands won't move to noncore districts even if a lower rent is offered," local retail director Terence Chan Yiu-fung said. "They still demand shops at first-tier streets to suit their brand image."
Knight Frank noted that retail rents in core districts are expected to rise 10% to 15% this year due to limited supply, while expansion by international retailers will continue to spill over into non-core areas.
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