But near-term outlook remains positive, with prime location shop rents expected to grow by 8% in the next 12 months
11 April 2013
Hong Kong retail sales have grown phenomenally in the decade since the stagnant period that followed the outbreak of SARS in 2003, leaping by 227% from HK$12.7 billion to HK$41.4 billion between February 2003 and February 2013.
“The introduction of the Individual Visit Scheme (IVS) in July 2003 fired up the growth engine of the local retail sector. This has resulted in a 10-year ‘golden period’,” reports Joanne Lee, Manager of Research & Advisory at Colliers International (Hong Kong).
The number of Mainland visitor arrivals in Hong Kong has risen continuously since the IVS was first launched and its subsequent extension to include more Chinese cities. The figure was 16.6 million in 2002, the year before the IVS was launched; in 2012, it was 48.6 million, an increase of 193%.
“As more mainland Chinese visitors travel to Hong Kong, their contribution to tourist spending in the city’s retail market has become ever-more substantial,” Lee notes. In fact, their spending leapt by 298%, from HK$28.1 billion in 2002 to HK$111.8 billion in 2011, and their share of Hong Kong’s total tourist spending grew from 51% to 67% during the same period.
Catering for the interests of the new and rapidly growing numbers of mainland China consumers – who are cash rich, able to afford luxury goods and keen on overseas brands – has fundamentally changed the Hong Kong retail sector.
Helen Mak, Senior Director of Retail Services at Colliers International, points out that many international brands regard Hong Kong as a developed metropolitan city that is also a perfect place to build awareness and recognition of their brands in the minds of mainland Chinese visitors. Many such companies, especially those in the fashion, watch and jewellery sectors, have opened flagship stores in prominent locations throughout the city. This explains the skyrocketing rents, particularly on some prime shopping streets.
For example, according to Colliers International’s Hong Kong retail rental index, rents in Queen’s Road Central and Russell Street in Causeway Bay grew by a staggering more than 400% between the end of 2002 and 2012.
“Hong Kong is well-known as a shopping mecca, with numerous international brands opening shops here. However, ever-rising and eye-wateringly expensive shop rental levels have forced some long-established and distinctive local retailers and restaurants out of prime shopping districts. The variety of retail elements, which is so important for the sustainable development of a shopping destination, has gradually declined on these streets. That is creating a potential risk for the Hong Kong retail market that will materialise if the shopping style of Chinese visitors changes, which is not inconceivable,” Mak cautions.
Mainland Chinese consumers are renowned for their quick learning curve. A number of the more-affluent ones nowadays prefer to travel to western countries to buy the latest or limited edition international brand products there, rather than coming to Hong Kong for occasional shopping trips as they used to do in the first few years after the IVS was launched. Online shopping is also gaining popularity in mainland China, which threatens the preference of mainland Chinese visitors to visit Hong Kong for shopping.
Mak thinks the changes in the consumption patterns of mainland Chinese and their consequent impact on Hong Kong’s retail market will not happen all of a sudden; but it may happen at a faster pace than people currently expect. International brands and flagship stores have been a strong focus and driving force in the growth of the local retail market over the past 10 years. However, now is the right time to plan a response to future changes in consumer shopping styles in order to keep the retail market competitive. For instance, the government and public could consider ways to support and preserve characteristic local shops and restaurants, and diversify the elements of the local retail sector.
Hong Kong’s reputation as a shopping paradise remains solid in the short-term, given its advantages of the absence of sales taxes, high-quality services, growing tourist arrivals and solid local consumption within a stable economy. These positive factors are supporting the demand for retail leasing, and ultimately local shop rents. The average rent of ground-level shops in the key shopping districts – Central, Causeway Bay, Mong Kok and Tsim Sha Tsui – is projected to increase by 8% year-on-year during the coming 12 months.