The latest statistics issued by the Government indicated that the local GDP growth moderated from 7.3% year-on-year (YoY) in 1Q 2008 to 4.2% YoY in 2Q 2008 but continued to stay above its long-term growth trend of 3.8% YoY. Looking at the breakdown of major economic components, the level of private consumption expenditure in Hong Kong experienced a sharp retreat from a growth of 7.9% YoY in 1Q 2008 to 3.1% YoY in 2Q 2008 due to the negative wealth effect created by the consolidation of stock market prices in the order of more than 50% decline since the beginning of 2008.
Retail Market
As far as the retail market is concerned, local consumption sentiment has been challenged by the continued fall of the local stock market prices. In addition, the prevailing inflationary pressure has gradually eroded the purchasing power of many households and threatened their overall income in real terms.
Notwithstanding the cautious local consumption sentiment, the total spending attributed to the inbound visitors remained relatively resilient as of August 2008, shortly before the dramatic changes in the global financial markets. According to the Hong Kong Tourism Board, the total number of visitor arrivals was 2.7 million in August 2008, of which mainland China visitors continued to represent the bulk of the pie, accounting for 63% of all tourist arrivals.
Growth Tapers off
Meanwhile, the local retail sales continued to show positive growth. As of August 2008, the total value of retail sales grew 10.3% YoY to HK$22.8 billion. During the three-month period between June and August 2008, the total value of retail sales increased 11.9% YoY to HK$69 billion. In fact, the pace of growth has moderated from 17.1% YoY during the preceding three-month period ended May 2008.
Given the prospective ease of local inflation and the slowdown of economic growth across the globe, the growth of retail sales is going to taper off further over the next 12 months.
Knock-on effect on retail leasing market yet to come
Although the latest available macro evidence, such as the trend of retail sales, continues to post positive growth, it has not yet reflected the knock-on effect attributed to the recent turmoil in the global financial markets. "According to the typical time lag, the full impact on the retail and consumption market will be felt some three to six months after the recent changes in the external environment," said Simon Lo, Director, Research & Advisory. "Individual cautious retailers reckon that the damage to the financial system may eventually have an impact on the local economy, thus representing a major challenge to their overall business strategies going forward."
The majority of retailers in Hong Kong remain positive for the long-term on the local retail market but the activity in the leasing market was less positive in 3Q 2008 compared with that in the first half of 2008. Prompted by the recent changes in the global financial markets and the trend of slowing demand on the leasing front, a number of vendors have reduced their asking rentals during 3Q 2008. According to the Colliers research, the average retail rental in the four traditional shopping districts, including Mong Kok, Tsim Sha Tsui, Central and Causeway Bay, decreased 4% quarter-on-quarter (QoQ) in 3Q 2008.
Focus on core areas
"Despite the fact that individual retailers are concerned about the prospective turnover growth of retail sales, top-end international labels remain firm on the long-term plans in Hong Kong in terms of sourcing the best locations for their retail flagships," said Helen Mak, Director, Retail Services. "Although there are individual retailers going for a retreat, there were no signs of overall demand contraction on that front."
With a mild retreat in retail rentals, retailers taking a long-term investment perspective of Hong Kong have viewed this as an opportunity to enter the market. "Prime retail units in traditional shopping locations continued to be favoured by a broad range of retailers. Strategically, some local retailers have started rationalising their retail outlets by putting more resources into the core areas and shutting down underperforming outlets in non-core locations," added Helen.
Vertical retailing in the sub-market of Causeway Bay
Amongst the various core shopping areas, Causeway Bay continues to be one of the most favoured locations for most retailers. Differentiated from Central, the sub-market of Causeway Bay carries its own feature that it is the shopping destination for both local people and foreign visitors including the massive groups coming from mainland China.
In addition to the ease of connection to public transportation such as Mass Transit Railway (MTR), the sub-market contains a full range of retail facilities ranging from high-street shops (e.g. Russell Street), open-air bazaars to sizeable shopping malls such as Times Square. The availability of a good mix of different dining facilities such as large-scale Chinese restaurants and boutique-type food and beverage outlets has made the district a popular destination for both local shoppers and inbound visitors.
In addition, the sub-market of Causeway Bay has been popular amongst the visitors coming from the mainland China to Hong Kong under the "*Individual Visitor Scheme" ("IVS") due to the attraction of the two landmark retail developments – Sogo Department Store and Times Square. Meanwhile, the sub-market has agglomerated with a vast number of audio-video shops, jewellery outlets and a range of local fashion labels which have been favoured by the majority of IVS visitors.
* IVS is one of the key plans under the initiative of Closer Economic Partnership Agreement, which has been implemented by the China Central Government since 28 July 2003 to allow more mainland residents to visit Hong Kong in an individual capacity
Spending by the youngsters
Further to the contributions from inbound visitors, the spending by local youngsters has been one of the major buying forces underpinning the retail market amid the continued economic growth over the past years. The size of population in the 15 to 24 age bracket (i.e. youngster) has been increasing in the past decade. In 1991, there were 839,841 in that age bracket and the number rose to 920,445 by the end of 2001. A slight drop in 2006 to 909,005 and it is anticipated that further growth will bring the total to 922,400 by 2011. This group of youths generally has a higher propensity to spend. Data showed that 80% of the youngsters have been staying with their parents, and in other words, they retain a major portion of their income for purposes other than renting a flat. By experience, most retail outlets, especially those selling trendy products, in the traditional shopping districts have been catering for this group of population.
By virtue of the fact that the retail format in Causeway Bay contains a lot of varieties covering nearly every type of retail products across the full price spectrum, the sub-market has gradually developed itself into a "fashion hub" to attract a massive group of local youngsters who love to chase the most up-to-date fashions and trendy products.
Growth Pattern
Amid the general lack of new supply in the marketplace, the trend of retail development in Causeway Bay has been going horizontal (i.e. horizontal extension from Causeway Bay North to Causeway Bay South). However, with limited number of suitable sites for redevelopment, the latest trend in the sub-market is that there has been increasingly number of retailers moving their operations from ground-floor level to retail units on the upper floors of a number of multi-storey commercial buildings. As supply shortage continues, the prevailing demand growth pattern is bilateral with tenants exploring into the adjacent streets in the shopping core of Causeway Bay (i.e. horizontal expansion) as well as moving themselves to retail units on upper floor levels (i.e. vertical retail).
Instead of going through the path of redevelopment of real estate into retail-related premises, a number of existing commercial premises in the sub-market have been eventually converted into retail uses. The advantage over redevelopment is that the converted premises can provide immediately available property alternatives for retailers who have prepared to move upstairs. Essentially, the so-called "vertical retail" developments have been increasingly popular in Causeway Bay since it has been proven a success over the past years. Vertical retail units provide tenants with immediate and inexpensive alternatives filling the gap in the marketplace where no new supply is available in the shopping core of Causeway Bay.
The perfect fit
Although a number of the converted premises are limited by their existing physical layout and the provision of vertical transportation facilities (i.e. passenger lifts), vertical retail units have been favoured by a vast number of retailers who want to keep their business in the same locality but in a much less expensive premises. Unlike typical top-end international brands that have to open on high streets with a high degree of visibility, tenants going for vertical retail units have no such prerequisite since the majority of their businesses are generated from repeat clients and upper-floor retail units provide the most appropriate environment for, say, learning centre and spa.
In addition, retailers engaged in food and beverage business such as theme restaurants, bars, coffee shops, beauty/health-care services, salons, karaoke boxes and other retail-related operations have found vertical retail units as the perfect fit for their business models.
