After encouraging figures in late 2017 and early last year indicated Hong Kong retailing had turned a corner for good, it might be back to square one this year.

Making any concrete statements about Hong Kong’s volatile retail sector is somewhat like making statements about its weather: you can look at the data and study the patterns, but things can change at a moment’s notice. But where weather is rooted in science, a great deal of retailing relies on sentiment, and the second half of last year appears to be grappling with sentiment that could potentially stall a sustained recovery.

Let’s rewind a few months. After the market appeared to bottom out in 2012, recovery seemed just around the corner. There was cautious optimism at the beginning of the year following six straight growth quarters, mainland visitor arrivals continued to trend up and retail-sales figures for the first six months of 2018 were strong — particularly in sportswear, cosmetics and everyday essentials.

Then came interest rate hikes, a correction in the equities market, a gradual drop in residential values and a trade spat between the US and China that evolved into an outright trade war by summertime.

Retail sales growth began decelerating by July and August to rest at just over 12 per cent year-on-year growth according to third-quarter figures. That in the wake of a weakening RMB and interest-rate increases that finally became a reality.

Mainland shoppers refocused their spending on affordable luxury and convenience items, and data suggests the record number of visitors to date (9.23 million) did not translate to retail sales. Both Mainland Chinese and Hong Kong consumers have curbed spending in the wake of uncertain Sino-US trade relations, and a stock market closely linked to real estate market sentiment have made consumers skittish.

Despite all that, shopping mall rents overall have grown a modest 1.7 per cent last year and vulnerable street shops gained 3.3 per cent, even when a third-quarter dip is factored in. Additionally, mainland and international brands have not abandoned Hong Kong’s retailing landscape, and many continue to explore expanding in the SAR, albeit modestly.

At the same time as the office sector is being buoyed by incoming mainland finance, insurance, real estate and business services, new brands from the mainland such as Balabala, Nome and Mo & Co, are entering the market. Familiar faces in well-performing sectors such as athleisure, footwear and accessories (for example, Foot Locker, Nike, Puma, Charles & Keith), and expansion by food and beverage operators like Haidilao, Xiheyayuan and Hero Shu continue to expand their networks.

In the current climate, landlords have opted to renew leases well in advance of expirations in order to retain tenants. The imminent arrival of Gigasports at Elements hints at growing price-point flexibility among premium mall landlords — a move that not only boosts the tenant mix for consumers but helps mall operators distinguish themselves from the herd.

Cliff or cycle?

So what does it all mean? Is retailing about to go off a cliff again, or is this just another cycle to ride out?

Undeniably, retailing is at a crossroads heading into the crucial Lunar New Year season, like Christmas, always a bellwether for the retail industry. The fear is that caution will bring the market to a screeching halt once again, as retailers muddle through amid lower tourist spending and depressed local sentiment.

Caution is not necessarily a bad thing. A shake-up in Congress in Washington in November may not mean the end of trade friction, but it could be a reason for retailers, landlords and shoppers to wait and see if policy softens. The new XRL high-speed rail link carried an impressive 84,000 passengers into Hong Kong over the line’s first two days during Golden Week, and that doesn’t mean they won’t spike at Lunar New Year again.

Retail locations along the connecting Tung Chung line such as IFC and Olympian City stand to benefit from an influx of tourists, following on from increased pedestrian traffic already recorded at Elements (the beneficiary of an XRL promotion) and Harbour City this year.

Like the weather, retailing’s prospects for 2019 could turn on a dime — regardless of how cloudy it looks right now.

* This feature was originally published in Inside Retail Hong Kong’s quarterly magazine edition. You can subscribe to the hard copy or digital version here.