The Hong Kong retail market has faced a recent downturn, coinciding with a significant increase in northbound travel by local residents and additional structural shifts, according to Savills in its Market in Minutes – Hong Kong Retail Leasing report of July 2024.
- Northbound travel has surged, with monthly trips reaching an average of 7.2 million per month in 1H 2024, up from 3.9 million in 1H 2023.
- The surge in northbound consumption is not the sole reason for the retail market's decline.
- Structural shifts like high interest rates and the exodus of young and middle-class talent have further impacted local retail spending.
- Savills forecasts a 5% - 10% rental decrease in both prime street shops and prime shopping malls in 2024.
Hong Kong Retail Slump Coincides with Surge in Northbound Travel
The retail market in Hong Kong has seen a recent downturn, coinciding with an increase in northbound travel by Hong Kong residents. The surge in northbound travel, with monthly trips reaching an average of 7.2 million in the first half of 2024, up from 3.9 million in the first half of 2023, has been driven by factors such as improved accessibility to the Greater Bay Area, a wide variety of retail and dining attractions in Shenzhen, and the presence of big-box retailers such as Sam’s Club and Costco offering low-cost necessities.
Surge in Northbound Travel is Not the Only Contributing Factor
While the increase in northbound travel has been a contributing factor, there are several other structural forces at play that are impacting the retail landscape in Hong Kong. It's crucial to note that the total outgoing travel number in 2023 reached 72.2 million, which was only 78% of the 2018 peak. Meanwhile, inbound tourist numbers only rebounded to 34.0 million, slightly more than half of the figure recorded in 2018. This suggests that the trend of northbound travel was already present before the COVID-19 pandemic. Consequently, it would be an oversimplification to attribute the retail market's sub-par performance solely to the surge in northbound travel.
Multifaceted Structural Factors Behind Hong Kong's Retail Slump
The Hong Kong retail sector is facing a confluence of structural factors beyond just the surge in northbound travel. One key driver is the significant strengthening of the Hong Kong dollar, which has appreciated between 10 - 30% against major currencies over the past two years due to interest rate hike. This has led to more local residents opting to travel and spend abroad, while inbound tourist spending has dropped by 48% from 2018 - 2023.
Additionally, Hong Kong has experienced a substantial outflow of young and middle-class talent, with over 200,000 individuals aged 20 - 39 leaving the city permanently in the last four years. This exodus has dealt a significant blow to local retail spending. For those middle-class Hongkongers who have remained, rising mortgage payments due to sharp interest rate hikes have eroded their disposable incomes by over 20%. In this environment, the new shopping malls in Shenzhen, offering more affordable retail, dining and entertainment options, have become increasingly appealing to the local middle class seeking to maintain their standard of living.
2H 2024 Retail Market Would Remain Challenging
The Hong Kong retail market is expected to remain highly competitive in the coming years, with over 10 million square feet of new shopping malls scheduled for completion by 2026 and beyond. This influx of new retail space comes as the sector is already grappling with the impact of reduced local and visitor spending, as well as the unsustainable business models of some operators that had become reliant on pandemic-era subsidies, leading to a wave of retail and F&B closures. The challenges are reflected in the overall 1.8% quarter-over-quarter decrease in major prime street rental, with a more significant 5% drop in Mong Kok, as well as a 3.4% decline in major shopping centre rental. Looking ahead, Savills forecasts a 5 -10% decrease in both prime street shop and prime shopping mall rents in 2024, underscoring the highly competitive and structurally shifting nature of the Hong Kong retail landscape.
Mr. Jack Tong, Director, Research & Consultancy of Savills commented, “Since the latter half of 2023, northbound travel has experienced a significant uptick. While a considerable portion of potential retail spending has been redirected to southern China, there are additional structural shifts occurring within the local retail market that underlie the recent downturn.”
Mr. Barrie Chan, Senior Director, Retail of Savills said, “The Hong Kong government is implementing initiatives to revive the local retail sector, including expanding the IVS scheme and hosting major events to attract more tourists. However, the impact of these efforts will take time, and the retail market is expected to face ongoing challenges from structural shifts in local and visitor spending patterns, at least for the rest of 2024.”