The top luxury brands experienced remarkable growth, while overall retail industry did not see any substantial growth compared to Q2, according to Savills in its Market in Minutes – Hong Kong Retail Leasing report for Q3/2023.
- Top luxury brands experienced a rebound in retail sales in Q3/2023.
- Overall retail industry did not see substantial growth due to rising interest rates and changing spending habits.
- Core shopping and dining areas continue to attract new tenants, however, small-scale restaurants focusing on takeaway market experienced a slight reduction.
- Prime street shops and major shopping center rents increased by 1% and 0.8% in Q3/2023.
- Some smaller retailers are exploring new business opportunities in prime area with lower rents, while large retailers are expected to be more cautious and slow down their expansion plans.
- Retail rents are forecasted to grow at a modest rate of 5% as we enter 2024.
Luxury brands thrive as sales surpass pre-pandemic levels
The first summer break without border restrictions since 2019 saw the signs of retail market recovery in the third quarter of 2023, with notable growth observed in the sales of top luxury brands. Many luxury retailers reported sales figures surpassing the pre-pandemic levels of 2019, and in some cases, even outperforming their 2018 records. The significant price difference of up to 20% between Mainland China and Hong Kong for luxury products played a crucial role in driving this surge. Additionally, a significant portion of international brands witnessed sales returning to 80 – 90% of their pre-COVID levels.
Slower market rebound amidst rising interest rates and changing consumer behaviour
However, despite the positive performance of luxury brands, the overall retail industry did not experience substantial growth compared to the previous quarter. The increased mortgage burden caused by rising interest rates constrained local spending, affecting household disposable income for miscellaneous goods and entertainment. Additionally, changing spending habits among Mainland visitors and the weekend activities of Hongkongers have also contributed to the slower retail market rebound. As a result, many retailers remain cautious about expanding their operations due to the slower-than-expected recovery.
Challenges and opportunities for small-scale takeaway restaurants and suburban retail spaces
While core shopping and dining areas continue to attract new tenants and businesses, small-scale restaurants focusing on the takeaway market have seen a slight reduction in occupancy. For instance, the "2 Entrees Plate" restaurants, which thrived during the COVID-19 dining restrictions, now face the challenge of expiring short-term leases. The absorption of these potential vacant spaces, especially in suburban residential areas, is crucial.
F&B and fashion ventures and Mainland brands explore opportunities
In response to the challenging market conditions, some operators are exploring new business opportunities in prime areas with lower rents. This includes ventures in the food and beverage, goldsmith, and local fashion sectors. The beauty and health sector, benefiting from the recovery of tourism, has also experienced growth. Zakura, a new beauty and health franchise retailer catering to Mainland visitors, has opened three shops in 2023, strategically located in Tsim Sha Tsui (Granville Road, Canton Road, and Haiphong Road), capturing the recovering demand from Mainland visitors. Many mainland brands continue to boom in core locations such as popular Mainland restaurant brand, Tai Er, has opened 4 branches since June 2023, to cater the demand for Chinese cuisine in Hong Kong.
Factors Influencing Hong Kong's Retail Rental Recovery and Outlook for 2024
As we approach the end of 2023, several factors will influence operators' decisions and the pace of retail rental recovery. These include the recovery of Mainland and local economies, residents' spending patterns, interest rate fluctuations affecting household disposable income, and the introduction of new retail concepts and themes to engage local customers.
Given the ongoing challenges faced by both Hong Kong and the global economy, the outlook for retail sales growth may not be as optimistic as anticipated when the borders opened earlier this year. Large retailers are expected to adopt a more cautious approach and slow down their expansion plans due to market uncertainties. On the other hand, smaller retailers can leverage the low rental environment to acquire prominent retail spaces. As a result, retail rents are forecasted to grow at a modest rate of 5% as we enter 2024.
Mr. Jack Tong, Director, Research & Consultancy of Savills commented, “Local spendings is constrained by the increased mortgage burden die to interest rate hikes, meanwhile Q3 retail sales remain relatively flat.”
Mr. Barrie Chan, Senior Director, Retail of Savills said, “Recent trend shows that Chinese restaurant franchise are opening locations in Hong Kong to test the market sentiment before expanding to UK or US market. More Chinese restaurants are expected to set up several locations in Hong Kong before introducing themselves to the global market.”