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Hong Kong retail leasing market seeing slowdown

On the front of local spending, the market was clouded by the falling stock market prices and deteriorating job market conditions.  However, the downside effects were mitigated by the support of visitors' consumption, especially the mainlanders.  Comparing to the period in 2003 when Hong Kong was in the midst of a deep economic trough, the current adjustment in retail leasing market has been less severe.

Thanks to the sustained contributions from inbound visitors particularly the group from Mainland China, the annualised growth of retail sales continued to stay in a positive zone. "The latest result was encouraging with the total value of retail sales increased by 7.4% year-on-year (YoY) as of January 2009," said Simon Lo, Director of Research & Advisory. "It contrasted with the severe contraction of over 20% YoY registered in mid 1998 when the local retail sales were hard hit by the regional currency crisis."

Amongst different types of retailers, well-known international brands are still seeing solid demand from mainland visitors.  Those selling leather shoes, fashion including handbags and clothing, and cosmetics, which strongly depend on branding, were especially favoured by mainlanders since they are confident in the retailers' reputation recognised in Hong Kong.

"The Central Government finalised the relaxation of the current Individual Visit Scheme to cover the 2.2 million residents in Shenzhen. It is expected that more mainland visitors will visit Hong Kong and eventually generate more visitor spending. It's a great benefit to the retailers mentioned earlier," said Helen Mak, Director of Retail Services. "In anticipation of growing visitor demand, international brands remain confident in the local market. They continue to look for prime locations for opening new shops under the current challenging environment."

As the overall retail rentals (ground-level shops) in the traditional shopping districts have fallen 3.1% between November 2008 and February 2009, it is an opportunity for retailers to enter the prime locations with a relatively lower rental cost.  Moreover, international brands mainly compete for the primest locations in traditional shopping districts, in order to concentrate their service on the anticipated growing visitor demand.  "This phenomenon results in diversification in the market, with the primest spots continued to be sought-after while the second-tier areas kept on suffering from the negative effect of the slowing economy," commented Helen. 

"Amongst various shopping districts, Tsim Sha Tsui has potential to be benefited most by the visitors' support.  In addition to its recognition as a popular tourist spot in Hong Kong, its retail infrastructure will be further strengthened by the shopping centres that are due to complete in the next few years."

Amid the current uncertainties in the market, some retailers choose to commit short lease term of vacant units in traditional shopping districts in order to keep high flexibility. However, a short lease term could result in a long-term leasing commitment. Recently a retailer committed to a long lease term of a shop in Causeway Bay after renting it for a short period during the peak season at Christmas last year. The example showed a vote of confidence in the retail market.

Looking forward, retail rentals will be edging down but the pace of downward adjustment is going to taper off to 7% in the next 12 months.