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Expert Insights | Community malls prove lasting investment

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Why local community malls will be key to future performance of Hong Kong’s retail sector, writes Dominic Chung, Executive Director, Capital Markets & Investment Services, Asia

 
The ability to access everyday necessities at local community malls has been an important part of the resilience of Hong Kong and its residents since 2019. These locations are likely to lead the revival of the Hong Kong retail scene in the second half of this year.  

With Hong Kong holding the world record for the highest commercial density, with one mall per square mile or 5,606 square metres per square kilometre, it is no surprise that the range of shopping malls in the city is extraordinary. Spanning everything from small arcades that locals rely on for their groceries and other daily requirements to large complexes that supply retail opportunities to suit every wallet, they can sometimes double up as leisure and entertainment venues with, for example, cinemas and ice rinks. As such a feature of Hong Kong life, residents have been flocking to shopping malls for decades. 

High-end shopping malls have usually been able to rely on the steady influx of overseas travellers, as well as those from Mainland China, to enhance the spending of their local clientele. However, since the social protests of 2019 and the onset of Covid-19 the following year, it is the more local community shopping centres at the heart of residential areas that have come into their own. They have weathered the downturn over the last three years that has battered luxury retailers.  


"They have weathered the downturn over the last three years that has battered luxury retailers."


While local consumers have always been an important part of Hong Kong’s retail sector, their value rose even further when the flow of international visitors and business people and shoppers from Mainland China into the city dried up. Their scarcity saw retailers having to rely almost exclusively on local consumers for their sales.

The advantages of Hong Kong’s local community malls are that they are part of their area – they are not situated in out-of-town locations that people need transport to access – and they stock items that people rely on to live no matter what the economic conditions are. 

Government figures put the fall in the number of inbound travellers between 2019 and 2020 at over 90%. Unsurprisingly, retail sales nosedived as a consequence. However, evidence also suggests that local consumers provided some respite, with their retail spending showing year-on-year growth since May 2020. 

They have also been shown to be highly reactive to any relaxation in Covid-19 precautions and financial assistance, including three rounds of electronic consumption vouchers, from the government. Previous handouts in 2021 were said to have helped boost monthly retail sales by double digits. 

As a result of the loyalty and resilience of Hong Kong residents and their patronage of local community malls, these places have also risen up the list of less risky opportunities that investors look for during tumultuous times.  Though they have not been immune from Covid-19 restrictions, they are showing their resilience as an asset class and have become a viable anti-cyclical or defensive investment strategy for real-estate investors. 

Before the social protests of 2019 and the Covid-19 outbreak, local and international investors were already looking at smaller malls and shopping centres in Hong Kong’s residential areas because of their solid rental yields and their potential for redevelopment and resale.  


"As a result of the loyalty and resilience of Hong Kong residents and their patronage of local community malls, these places have also risen up the list of less risky opportunities that investors look for during tumultuous times."


Institutional investment 

In fact, some institutions have been involved in a string of other transactions in recent years.  

In November 2017, Gaw Capital Partners, a private equity fund management firm focused on real estate in Asia Pacific, won a bid, through its funds and with consortium partners including Goldman Sachs, to acquire 17 shopping centres in Hong Kong for HK$23 billion (US$2.9 billion). It was back in the market a little more than a year later, in March 2019, to lead the acquisition of 12 more for HK$12.01 billion (US$1.5 billion) with Blackstone. Gaw is managing these assets as part of its “People’s Place” platform of vibrant community hubs. 

Higher yields

In December 2017, a joint venture between Pamfleet, a real estate investment fund also focused on Asia Pacific, and Chelsfield, a UK property developer, bought Provident Square, one of the largest malls in North Point for HK$2 billion ($256 million), with a view to rebranding and repositioning it following renovation and improving the tenant mix.  

In October 2018, a Phoenix Property Investors-led consortium bought three shopping centres in Tseung Kwan O for HK$3.38 billion and a month earlier, local developer Winland Group bought retail plaza Nob Hill Square in Lai Chi Kok for HK$900 million.

The good news about community malls in Hong Kong is continuing even in the midst of tough conditions. 

Link REIT, the largest REIT in Asia, reported on June 1 that occupancy of its Hong Kong retail assets reached 97.7% with 4.8% growth in rental reversion and 98% rental collection in the year to March 2022. Link said that its results “showed that the Covid recovery was well underway”:  its tenants’ sales grew by 10.3% and food and beverage sales were up 16.6%. “[The] gradual relaxation of social distancing measures in May 2022 has been positive to the tenants/our business,” it added.  

Purchasers interested

Others are aware of their appeal too: from early 2021 to mid-2022, developers and owners of community shopping malls have found investors interested in buying them. We believe the trend will continue in second half of 2022.  However, for high-occupancy community shopping malls, vendors and buyers have much different expectations. While foreign institutional buyers are looking for yields of 4.5% to 5% because of the upward pressure on interest rates, they have found that vendors are only willing to sell at the 4% level.  Interestingly, however, the recent sale of a local community mall in Tai Po achieved a yield of 3.8%.  

We remain sanguine for the remainder of 2022 and expect to see a swift rebound of the retail market. Local consumers spending for necessities in community malls as part of their daily life continue to play a key role in that recovery. 

With uncertainty remaining over when unrestricted international travel and travel between Hong Kong and Mainland China will resume, retailers’ fortunes may be tied to the willingness of residents to spend money in these locations.  


The article was published on South China Morning Post on 12 July 2022. 


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Dominic Chung

Executive Director | Asia

Capital Markets & Investment Services

Hong Kong

Dominic has more than 30 years of real estate experience, with more than 26 years focusing on investment transactions, 20 years exposure to mainland China market. 

Prior to joining Colliers International, Dominic was the Co-head of Investment Properties for China and the Head of Investment Properties for Hong Kong at CBRE, respectively during the period from 2010 to 2014. He revamped the company’s investment agency business in Hong Kong and China. He built the Hong Kong investment department from a small team into a sizeable investment agency, with a strong market presence and record earnings in subsequent years.

Prior to CBRE, Dominic was with Jones Lang LaSalle from 2005 to 2009 as the Managing Director of Shenzhen, China and Head of Investment Sale, South China.  Dominic also ran his own investment agency in the late 1990s in Hong Kong and in Shanghai from 2002 to 2003. Besides Hong Kong and mainland China, Dominic has substantial cross-border transaction experience in investment markets in Asia and North America.

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