Moderate Pick up in Retail Leasing Activity

• Stimulated by the latest round of the Consumption Voucher Scheme, retail sales value rose by 11.7% YoY in April, before falling back by -1.7% in May as the stimulus effect faded
• Leasing activity picked up modestly in Q2/2022 in both core and suburban locations after a slow first quarter, mainly driven by F&B, grocery and lifestyle related trades
• Supported by improved sentiment in the leasing market, rents in both the prime street shop and major shopping centre segments remained relatively stable over Q2/2022 registering modest YoY growth of 1.7% and 0.4% respectively.
• Luxury brands continued to offload non-profit making stores but at the same time mass market and locally focused fashion chains took advantage of the lower rent environment to take up space in prime locations.
• Some of the new supply in the pipeline this year will be delayed to 2023, with many of the upcoming projects located in suburban locations to capitalise on fast growing residential populations.

Retail sales boosted by Consumption Voucher Scheme

Local consumer sentiment has been stimulated by the latest round of the Consumption Voucher Scheme which dispersed from April. The local economy grew by 1.2% (compared with a 0.7% GDP boost from the previous distribution), and the retail sales value rose by 11.7% YoY in April.  However, the sales value fell back by -1.7% in May YoY as the stimulus effect faded.  Despite the challenges, leasing activity picked up moderately in Q2/2022 in both core and suburban locations after a slow first quarter, mainly driven by F&B, groceries and lifestyle related trades. 

F&B sector took up the space

Notable transactions in core areas included IKEA taking up 15,000 sq ft in K11 Art Mall in Tsim Sha Tsui. Across the harbour in Causeway Bay, Market Place has leased 7,000 sq ft of space in the basement of Capitol Centre for around HK$500,000 per month; while a food hall has taken part of the space on 2/F and 3/F of Lok Sing Centre for a monthly rent of HK$1.5 million. Prime shops previously occupied by luxury fashion brands or tourist-oriented trades in core locations have also been snapped up by F&B, for example, the ex-Burberry space at 38 Russell Street has been taken by A La Carte who will open a Transformers-themed restaurant while the old Sa Sa space on the same street was leased to Five Guys.

In suburban locations, new-to-Hong Kong Japanese drugstore chain Matsumoto Kiyoshi has opened three stores in Kwun Tong (APM), Shatin (New Town Plaza) and Tuen Mun (TMT Plaza) since January 2022. It is confirmed that Matsumoto Kiyoshi will open its flagship store in Causeway Bay, taking over 14,000 sq ft in Hang Lung Centre. In further positive news, Don Don Donki has continued to expand its footprint in the city taking space in Amoy Plaza in Ngau Tau Kok and Whampoa Garden in Hung Hom. 

locally-focused retailers improved availability in prime locations

Luxury brands meanwhile have continued to offload non-profit making stores but at the same time mass market and locally focused fashion chains are taking advantage of the lower rent environment to selectively take up space in prime locations.

Supported by improved sentiment in the leasing market, rents in both prime street shop and major shopping centre segments remained broadly stable over Q2/2022 registering modest YoY growth of 1.7% and 0.4% respectively. Rental growth in the prime street shop segment was mainly driven by the rental improvement in the Causeway Bay sub-market which saw increasing transaction volumes.

In terms of supply, a number of projects in the pipeline this year will be delayed to 2023. Many of the new projects scheduled to complete over the next few years are in suburban locations and aim to capitalise on fast growing residential populations in areas such as Kai Tak, Tai Wai and Wong Chuk Hang.

Retail outlook clouded by economic uncertainties

In a retail economy reliant on domestic demand there are more than a few clouds on the horizon as stock market turbulence, rising interest/mortgage rates, inflation and an exodus of expats and local professionals come together to weaken the outlook for consumer spending in the second half. Any return of mainland tourists still seems a long way off as city lockdowns continue with the casino enclave of Macau providing the latest example.

On a more positive note, eligible registrants for Phase 2 of the CVS will include non-permanent residents. The expanded program will add an extra 300,000 people and an additional HK$1 billion, and this will give another boost to the local retail market, despite that rising mortgage rates and slower economic growth will hit the disposable incomes of local residents and reduce overall spending power in the second half of the year.

Mr. Simon Smith, Regional Head of Research & Consultancy, Asia Pacific of Savills commented: "After a tough first quarter market activity lifted in the second and modest rises in rents were seen in some areas. The latter half of the year will see a spending boost from the Consumption Voucher Scheme, but higher mortgage rates and slower growth may hold consumers in check."

Mr. Barrie Chan, Senior Director, Retail of Savills said: "Rents are now significantly below peak 2013/14 levels and are at or close to 2003 levels before the Individual Visitor Scheme unlocked mainland tourist demand and a shopping frenzy for luxury goods, pharmaceuticals, and electronics among other categories. After the current reset, we feel that another multi-year rally is possible as mainlanders once again return to Hong Kong’s shops but until then, today’s soft market conditions are likely to persist.