Exceptional demand from retailers and shopping tourists alike is compounded by the acute supply constraints of prime retail locations threatening Hong Kong’s regional competitiveness.

Hong Kong’s domestic consumption and visitor spending remain vibrant despite the continued stagnancy of many Western economies. In the first three months of 2012, the total value of retail sales increased 15.9% year-on-year. In addition, the average rents of ground-level retail properties increased 5.3% quarter-on-quarter or 22.0% year-on-year. Since 3Q 2009 retail rents have increased by a staggering 56%.

This continuing strong performance was underpinned by inbound tourism, particularly mainland visitors, who continue to favour high-end luxury items. As a result of this on-going demand and lack of opportunity in the West, international retailers continue to launch flagship stores in the city.

Acute Supply Shortage Brings Challenges
To better expose themselves to shopping districts well-trodden by mainland travelers, international retailers usually target retail space in either shopping malls or high-street shops that offer high foot traffic and visibility to inbound visitors.

In their search for suitable retail space, one of the biggest concerns for international brands is the lack of sizeable ground-floor retail units in prime shopping locations. Faced with limited options, international retailers are typically forced to enter an aggressive bidding war in order to secure a location. Retail rents of first-tier streets are often exceeding HK$1,200 per sq ft per month, or three times the rental of ten years ago.  

What are the alternatives? Older buildings? Cheaper locations? The reality for many is being forced to shy away from Hong Kong. Older buildings present physical problems such as small floor area, low ceiling heights and poor amenities preventing state-of-the-art designs and fit-outs demanded by many retailers. Cheaper locations simply do not wash with top end brands. Good for landlords, bad for Hong Kong. Retail rents in prime shopping locations continue to thrive at the expense of the city’s regional competiveness.

Hong Kong’s Loss Benefits Other Asia Markets
Continuing interest from retail brands looking to capture mainland Chinese visitors’ spending is no longer a guarantee to Hong Kong’s success; if there is no resolution to the acute supply-demand imbalance in the retail property market. As the costs of rentals increase, so inevitably does the cost of the products being sold. This will ultimately drive tourists away to the benefit of the other markets, such as China and Singapore, where shop sizes and location requirements can be met more easily at lower rents.

In China, the establishment of well located and designed quality retail malls is catching international retailers’ and mainland shoppers’ attention respectively. Despite duties applied to many products not applicable in Hong Kong, the cheaper occupancy and labour costs are in some cases more than off-setting this.  Some individual retailers who initially planned to make Hong Kong a stepping stone before entering the China market are no longer considering Hong Kong as an essential location. An example is GAP which launched its flagship store in Hong Kong last November after opening eight stores in China. Another is renowned UK fashion brand Topshop which opened its shop in China on 1st May 2012; needless to say, there isn’t an outlet in Hong Kong.

Looking For Solutions
Attractive alternative to Hong Kong exist for retailers. Marina Bay in Singapore provides a high-end luxury residential development in close proximity to a financial hub, luxury hotels and a modern shopping mall. This took planning and foresight to achieve. Marina Bay is a great example of long-term development and town planning by the Singapore government, with a resulting strengthening of its position in Asia as a retail destination.

Is it too early to say it is a trend for international brands to open their flagship stores in China and other Asian cities instead of Hong Kong? Maybe, but the signs are there. The continued growth of the Hong Kong retail sector is - and will continue to be - constrained by the lack of supply.

What can be done? In our view, government planning is vital. This includes the provision of supporting transportation facilities, government planning on land use and initiatives to provide more retail space through redevelopment or conversion. The Western Kowloon Cultural District is a feasible pathway to a new era of success for Hong Kong’s retail market supported by nearby office clusters, well-established shopping malls and residential developments. In a few years time, the Kai Tak development also has the capacity to create significant new supply.

In order to preserve Hong Kong’s competitive advantage as a shopping mecca worldwide, we have to stay vigilant to potential threats that may affect the territory’s status in a bid to safeguard Hong Kong’s competitiveness.