F&B Operators to Remain on the Lookout for Suitable Opportunities Amid a Tenant Favourable Market

• Signs of hope have emerged in Q1 with retail sales in January and February combined increased by 2.7% y-o-y, the first growth since Q1 2018
• Activity in the leasing market showed signs of pick-up with operators focused on local consumption took the opportunities to expand amid a tenant favourable market
• F&B operators is a key demand driver with half of the 65 F&B deals concluded by Savills since 2020 situated in non-core areas with rising population
• Savills expects F&B licensing to increase further over the near-term after growing steadily through the Social Unrest and the Pandemic

Hong Kong – 27 April 2021 – Signs of hope have emerged in Hong Kong’s retail market in Q1 with increased retail sales and pick-up in leasing activity. Driven by relatively unscathed local consumption despite the pandemic, retail sales in January and February combined increased by 2.7% y-o-y, marking the first growth in three years. Leasing activity also showed signs of pick-up with operators focusing on local consumption took the advantage to expand amid a tenant favourable market. F&B operators is a key demand driver with Savills Hong Kong advised on and completed 65 F&B deals since 2020.

A return to growth of total retail sales in the first two months of 2021 was primarily driven by local consumption. Sales in consumer durable goods increased by 28.1% y-o-y, after reporting a decline of 11.8% y-o-y and 24.4% y-o-y in each of the first two months of 2019 and 2020, respectively. Clothing and footwear sales also turned around, growing by 7.5% y-o-y after reporting eight consecutive quarter of contraction (with six of them each dropping by more than 20%). Local consumption has given life support to a market depleted of tourists, especially those from Mainland China. According to the Hong Kong Tourism Board, Mainland Chinese visitor arrivals scaled by 99.7% y-o-y to just 6,679 in the first two months of 2021.

Improved retail sales and market sentiment, along with a lower rental environment, saw a pick-up in retail leasing activity. With rents in prime street shop areas declining in the range of 4.0%-6.2% q-o-q in Q1 (around 74%-81% from their respected peaks) (Table 1), operators focused on local consumption saw a chance to lease shop spaces which were previously unavailable to them. Among the most notable, American Eagle agreed to lease about 7,400 sq ft (LFA) at LHT Tower in Central as their flagship store.

Table 1 – Core rentals movement in Q1 2021

F&B operators remained a key leasing demand driver amid a steady growth of number of F&B licensing since 2017 despite the negative impact brought to the economy by the U.S.-Sino Trade War, social unrest and the COVID-19 pandemic. Total F&B licensing amounted to 25,329 at the end of 2020, representing a 4.6% y-o-y growth.

These F&B retailers took the advantage of a low rental market to expand into non-core retail areas, especially those with increasing residential population and rising household median income. About half of the 65 deals done by Savills Retail Leasing team since 2020 was situated in three areas. These areas – namely Tseung Kwan O, Tsuen Wan and Tung Chung – have seen an influx of residential new supply entering the market over the last several years. International and Asian cuisine operators dominated the market, contributing to a combined 70% of market share in each of the three areas.

Mr. Barrie Chan, Senior Director, Retail Leasing of Savills said: "A tenant favourable market has drawn F&B operators setting up their first shop or expanding their presence in neighbourhood areas. We expect F&B operators to remain on the lookout for leasing opportunities over the near-term against an increased possibility of further easing of existing social distancing measures."

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