Cautious retailers, especially in the luxury sector, characterised the market in Q4 with few willing to commit until borders reopen, according to Savills in its Market in Minutes - Hong Kong Retail Leasing report for Q4 2021.
- For the retail market 2021 was another year best forgotten as some of the world's tightest travel restrictions and ongoing social distancing measures weighed on sentiment
- With tourists absent from Hong Kong's streets, the year was all about catering to local demand with F&B being the biggest winner
- Retail rents bottomed out in H2 2021 and prime street shop rents remained broadly flat in Q4. Over the course of 2021, prime street rents fell by 4.3%, compared with an annual decline of 33.2% and 23.4% in 2019 and 2020 respectively
- Supply of new retail malls in 2021 was scarce offering some support to rents
- 2022 could look quite similar to 2021. A grim prospect for sure, but on a more positive note, any subsequent easing of restrictions and border re-opening could set us off again on a post-2003 trajectory of record breaking growth.
Demand in the retail market is locally driven
Travel restrictions remained stubbornly in place and no travel bubbles emerged despite a lot of talk around a possible arrangement with Singapore. Throughout the year, social distancing measures remained largely in place, helped slightly by the introduction of local "vaccine bubbles" and various modes of operation for catering businesses from April 2021 which injected some life back into the sector.
The domestic retail market became almost exclusively locally driven in the absence of mainland tourists. The F&B sector benefitted as dining-out became the "new holiday" for locals. F&B emerged as a key market driver in the leasing market and proved to be the go-to sector for landlords. Other demand drivers included grocery related retailing, lifestyle trades and local brands.
Prime street rents began to bottom out in H2 2021, declined by 4.3% year-on-year The unemployment rate has been falling during the second half of 2021, with the latest rate down to 4.1% in the September to November period according to government figures, which is the lowest level since February 2020 when the impact by the pandemic on the local economy began. Combined with a solid local demand, retail rents have bottomed out in the second half of this year. While prime street shop rents remained broadly flat in Q4, over the course of 2021, prime street rents fell by 4.3%, compared with an annual decline of 33.2% and 23.4% in 2019 and 2020 respectively.
Rents in major shopping centres saw a minor improvement of 0.4% overall in Q4 but remained flat or dropped marginally (-0.1%) on Hong Kong Island. Similar to prime street shop rents, shopping centre rents have eased from a double-digit annual decline compared with the last two years and fell by 2.1% during 2021.
Major new supply will not hit the market until 2023
Despite the subdued sentiment, especially in the luxury sector, the fact that retail supply in 2021 was the lowest in six years gave some support to rents. Looking ahead, new supply will remain low in 2022 with only three projects scheduled for completion including Nan Fung's AIRSIDE in Kai Tak, the Hopewell Mall Extension in Wan Chai and Sun Hung Kai Properties' development at Yuen Long Station, providing a total of just over 1 million sq ft GFA of new retail supply.
The supply pipeline is expected to increase in 2023 in both urban and suburban locations, and key projects will include Sogo's Twin Towers in Kai Tak, MTR malls in Tai Wai and Wong Chuk Hang and the first phase of 11 Skies at the airport.
Full recovery of market depends on the time of border re-opening
The retail market is expected to continue to focus on local consumption in the first half of 2022 and leasing activity will remain subdued. The return of tourists, mainly from mainland China, will depend on border re-opening and will be the crucial factor in deciding 2022's fortunes. Although this looks unlikely to the extent it would impact retail demand given recent developments, we expect that with any easing of the pandemic, social distancing measures and/or travel restrictions, the recovery pattern beyond 2022 may look similar to the period after SARS when the Individual Visitor Scheme (IVS) was introduced, with a strong multi-year return of Mainland visitors.
Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "Looking to 2022, the emphasis will remain on domestic demand and sectors including F&B, groceries, supermarkets and local brands."
Mr. Barrie Chan, Senior Director, Retail of Savills said: "There is hope that land checkpoints may reopen in 2H/2022 which would help retail businesses especially in the New Territories submarket, where F&B and grocery-related trades are the main drivers."