The Hong Kong retail property market is growing strongly on the back of a robust luxury retail sector, and prime retail rents are expected to be on the upswing over the next three years, according to analysts.

The latest report from real estate consultants Jones Lang LaSalle shows that Hong Kong’s luxury retail sector has seen a strong rebound since the global financial crisis in 2008 with almost all luxury sectors experiencing double digit growth annually.
 
In 2010, gross sales of the luxury sector in Hong Kong grew approximately 20% year on year, outperforming the 18% growth recorded in overall retail sales. This translated into a strong demand and, hence, growth in the retail property sector,’ it says.

Strong labour market conditions and consumer confidence are underpinning retail demand across most markets in Asia leading to either stable or increasing rent in the region, according to Tom Gaffney, national director of the Retail Department at Jones Lang LaSalle.

The tremendous growth in luxury sales in Hong Kong has been attributed to a number of reasons. Some key factors include the absence of a ‘luxury tax’ in Hong Kong, which combined with the strengthening Renminbi versus a weakening US dollar that Hong Kong dollar is pegged to, made high end goods in Hong Kong comparatively cheaper to mainland Chinese tourists, the report points out.

Another driver is the growing number of mainland tourists visiting Hong Kong as the China government continues to relax the restrictions of Individual Visit Scheme. Hong Kong recorded total retail sales of approximately HK$325 billion in 2010, of which nearly HK$64 billion, or 20%, was directly attributed to shopping spending of mainland Chinese tourists staying overnight in Hong Kong.

In order to capture the lavish spending from mainland Chinese visitors and cater their thirst for luxury, many brands are looking to expand or set up their Asian flagship stores in Hong Kong, pushing rents up quickly. Many of the brands are seeking 5,000 to 10,000 square feet or above and looking for the flexibility to build large and extravagant facades on the exterior of the building, as tall as five storeys in some cases, which is seemingly becoming popular now in areas such as Central and Tsimshatsui.

Another trend being witnessed in the Hong Kong market is the entry of a wave of new mid-range international brands, which has a huge impact on the Hong Kong retail landscape. They take up large amounts of space at prime locations and offer attractive rentals in order to secure the key locations for their flagship stores in Hong Kong.
 
‘Landlords of luxury malls in Hong Kong are currently struggling with the constant demand from brands for more space, larger stores and more exposure, while at the same time trying to maintain a competitive yet interesting tenant mix. Nice problem to have some would say, but in truth, it is a bigger issue than we think. Without variety, malls may lose their competitive edge and, over time, potentially lose value in terms of what rentals can be achieved and turnover rentals that can be secured although this is yet to be seen,’ said Gaffney.

‘With strong and healthy fundamentals of the local economy and eve rising visitor arrivals from mainland China, the luxury retail market in Hong Kong will continue to grow and flourish, with more investments, bigger stores and more creative designs of the shops from luxury and international brands,’ he explained.

‘Looking ahead, the swelling sales and growing appetite for international brands will continue to present opportunities for Hong Kong landlords to raise their base rentals for the remainder of 2011 and for the coming few years. We also expect to see leasing demand from both local and international brands to remain strong as they aggressively look for business opportunities and expansion in Hong Kong, driving retail rentals even higher. Following this development, prime retail rents are expected to grow by 28 to 32% over the next three years,’ he added.

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