In a report published on October 12, Morgan Stanley said it favoured Hong Kong retail landlord stocks over their office peers because of the growing divergence in rents between the two sectors.
However, the ailing office market is not the yardstick to judge the performance of the retail sector. The best measure is the effectiveness of the sector’s response to shifts in the competitive landscape of the global retail industry, particularly those emanating from mainland China.
There are three threats to the recovery and a huge opportunity that must be seized for Hong Kong’s retail sector to appeal to both domestic consumers and tourists.
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274 million Chinese take a holiday: why ‘golden week’ 2023 was different
274 million Chinese take a holiday: why ‘golden week’ 2023 was different
The first threat is persistently high rents. Even after the dramatic decline in rental values since the peak in 2014, Hong Kong is still far and away the most expensive retail market in Asia.
According to data from JLL, average unit rents for high street shops in the city are 32.7 per cent pricier than in Seoul and 102.1 per cent higher than in Tokyo, the second- and third-most expensive retail districts in the region, respectively. The gap is even wider when it comes to prime shopping centres, with Hong Kong 92.3 per cent pricier than Guangzhou and 175.7 per cent pricier than Shanghai, the second- and third-most expensive markets in Asia.
Although rental affordability has improved somewhat, high rents remain the biggest challenge facing retailers in Hong Kong. It is also one of the reasons the sector is struggling to improve the quality of its brand mix to compete more effectively with other markets.
Tourists from the mainland wander through Mong Kok during the National Day Golden Week holiday on October 2. Photo: Xiaomei Chen
This makes the second threat more acute. Never mind that mainland tourist arrivals in the first 10 months of this year were well below their pre-pandemic level. The bigger concern is the surge in outbound travel. According to JLL, the inbound-outbound travel ratio had risen to 1:2.1 by September compared with an average level of 1:1.5 during 2015-2019.
Hongkongers are travelling to nearby Shenzhen in droves, incentivised by the strength of the Hong Kong dollar versus the yuan and more sophisticated and innovative retail offerings on the mainland. The scale of the “leakage” in domestic consumption has surprised property advisers. “We didn’t expect how eager Hongkongers would be to travel to Shenzhen,” said Kevin Lam, head of retail services at Cushman & Wakefield in Hong Kong.
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The third threat is the most troubling. Hong Kong’s retail sector is failing to respond quickly enough to far-reaching changes in consumer tastes and habits, brought on by a younger generation of social media users who are driving the growth of experiential retail. This is when a physical store offers its customers experiences that go beyond shopping such as zoos, exhibitions and sports events.
While the value of online sales in the first nine months of this year was 72 per cent higher than in the corresponding period in 2020, online shopping still accounts for less than 10 per cent of Hong Kong’s total retail sales, according to data from Cushman & Wakefield. In mainland China, the share is close to 30 per cent.
This disparity partly explains why Hong Kong retail landlords have been slow in diversifying the tenant and trade mix in their portfolios to provide the offerings and concepts domestic consumers and tourists increasingly favour.
Berkeley’s pop-up store on Russell Street in Causeway Bay aims to provide ‘experiential retail’, something much of Hong Kong’s retail sector lacks. Photo: Jonathan Wong
JLL notes that experiential tenants accounted for between a fifth and a third of new lettings in shopping centres in Shanghai and Beijing this year, and it describes the brand mix in shopping malls in Hong Kong as “monotonous”, with high rents stifling creativity and limiting the entry of experiential retailers. Cynthia Ng, head of retail services at Colliers in Hong Kong, said retail offerings in the city “lack the ‘wow’ factor”.
This is all the more reason for Hong Kong to do a better job leveraging its unique strengths in the region to enhance the appeal of its retail sector. Renowned for its vibrant arts and cultural scene, mega-events and rich natural environment, the city has the ingredients necessary for revitalising and shaking up its retail industry.
While there are headwinds – the sharp rise in mortgage rates that is squeezing disposable incomes, the global slowdown and mainland China’s economic woes – more creative collaboration between landlords, tenants and other stakeholders would increase the sector’s attractiveness and competitiveness. The government’s commitment to bolstering the tourism industry offers grounds for optimism.
Hong Kong’s retail market is unquestionably on the road to recovery. But in order for the upturn to be a meaningful and durable one, the sector needs to raise its game, particularly with such high rents.
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