The third wave of COVID-19 set back the slow recovery of the retail market in the Q3, but despite the rise in cases, the rate of decline in retail sales slowed in July and August.
The F&B sector was particularly hard hit, however, due to a restriction on the number of people allowed to gather and limited operating hours for bars and restaurants.
Hong Kong retail market sees early signs of recovery late in Q3
The third wave of COVID-19 set back the slow recovery of the retail market in the Q3, but despite the rise in cases, the rate of decline in retail sales slowed in July and August. The F&B sector was particularly hard hit, however, due to a restriction on the number of people allowed to gather and limited operating hours for bars and restaurants.
Tourist shopping spending has accounted for about one-third of the city’s total retail sales on average over the past 10 years but vanished once the government closed the borders for non-Hong Kong residents in March. Domestic demand, on the other hand, has remained relatively steady at around HK$180 billion over the first seven months.
Boosted by the incentives given by landlords and a marginal relaxation of government restrictions in early September, some shopping centres saw elevated local traffic on the weekends in late August and September. In some areas, queues of customers were spotted in front of luxury brand stores and restaurants.
Late in the quarter, the retail leasing market also showed signs of bottoming-out with some bargain-hunting activity from non-mainstream retailers. Local F&B chains are looking for expansion space in neighbourhood areas supported by large residential populations such as Tseung Kwan O, while lifestyle brands are eyeing locations with affluent local demand like Central. Necessity-focused retailers are looking to increase their footprint in both core and non-core areas. Mainstream retail segments such as fashion and apparel, sports, cosmetics products and watches and jewellery continued to suffer during the summer season with their sales value dropping by 44% to 54% in July YoY.
With signs of stabilisation, retail rents seemed to have found a floor in the third quarter of 2020. Prime street shop rents fell by -2.0% QoQ in Q3/2020 while shopping centre rents (base rents) remained largely stable. Landlords are keen to retain existing tenants and are willing to offer up to 30% rental reductions upon renewal while offers of a one-year lease extension are becoming more common. In terms of location, street shops and shopping centres with a strong focus on the visitor market are inevitably seeing higher vacancy rates.
According to our in-house trade and tenant mix analysis, overall vacancy in the 40 shopping centres we surveyed has increased more than two-fold from 2% in September 2018 (pre-social unrest and COVID-19) to 7% in September 2020. In terms of retail hierarchy, district malls in the New Territories witnessed the highest vacancy of up to 12% as some of their anchor tenants (often mid-range fashion brands and conventional Chinese restaurants) offloaded their larger outlets in these centres. In mainland tourist-favoured shopping malls such as Harbour City, Times Square and New Town Plaza we have also noticed high vacancy rates which have climbed to over 10% in recent months.
What does this mean for the retail market? Landlords and their tenants will have to rely on local consumption for the time being and the retail scene will shift further from luxury and general retail to mid-market and “whole of life” offerings. Retailing in the New Territories and Kowloon will recover faster once same-day mainland visitors return but the timing is uncertain.
Luxury brands have already shifted their focus to cities in the Greater Bay Area including Guangzhou, Shenzhen as well as Hainan Island and will continue reweighting to southern China and away from Hong Kong. A structural shift in the market fundamentals is inevitable and many believe that the new normal for retail sales will be 30% to 40% below 2018 levels. We continue to watch the economic situation with some concern as more widespread business distress and rising unemployment could undermine local spending and push any recovery out to beyond next year.
Mr. Simon Smith, Senior Director, Research & Consultancy commented: “While this is a very difficult situation to paint pretty, there were some early signs of returning activity in late September and a clearer picture of the new normal is beginning to emerge.”
Mr. Nick Bradstreet, Managing Director, Head of Retail Leasing said: “As we enter the ninth month of the outbreak we are seeing a greater focus on local and online spending, more flexible lease terms and an emphasis on lifestyle and value for money.”
Read the full publication with Hong Kong Retail Leasing - Oct 2020