Hong Kong retail rents have plunged 15.7 per cent in the first nine months of 2015 according to data from CBRE.
But worse is yet to come says the property specialist. The company predicts rents will have fallen between 20 and 25 per cent by the end of his year and they will shed a further 15 per cent in 2016.
“We believe that Q3 has been the worst season for the retail property sector in recent years, and that retail rentals are expected to experience a milder downward adjustment in the coming quarters due to a lower base of comparison,” said Joe Lin, executive director, retail services with CBRE Hong Kong.
The last quarter’s decline was the worst recorded since the first quarter of 1998 when rents slid back 9.1 per cent in core locations.
“The accelerated rental decline in Q3 2015 can be attributed to more retailers expecting bigger discounts from previous leases, and landlords becoming more flexible in lease negotiations,” said CBRE’s report.
“The sluggish retail environment in Hong Kong has been led by the plunge in sales of luxury items. According to government statistics, the retail sales of jewellery and watches for the first nine months of 2015 recorded a 14.7 per cent year on year (and a 22.9 per cent year on year drop in September alone).
According to CBRE’s report, The Changing Retail Landscape: How to Survive the Slowdown in Hong Kong?, many luxury retailers have either stopped renewing leases or have surrendered spaces well ahead of the lease expiry as a result of the market slowdown.
Most of these shops are located on Russell St and Queen’s Rd Central – areas that have benefited from the rising rental trend over the past decade. Some of the shops remain vacant, while others have retained their existing tenants by offering lower rents upon lease renewal.
“In light of the changes in mainland tourists’ spending patterns coupled with relatively strong local consumption, mid-range brands are set to expand,” said Lin. “In the past few months we have observed a number of cases of mid-market retailers taking up spaces made vacant by luxury retailers, such as multi-brand cosmetic retailers taking over shops previously occupied by luxury watch brands.”
The most recent case completed by CBRE was Adidas’ lease of a flagship shop on Queen’s Rd Central surrendered by luxury brand Coach.
“This is one of the most notable retail leasing deals of the year in Hong Kong,” Lin said. “It is the first case of a mass retail brand flagship store replacing an upmarket brand’s flagship in a core retail location.”
According to Lin, the Adidas deal marks a turning point in the Hong Kong retail market – luxury brands will no longer dominate the market.
“This is the beginning of the retail market’s post-Chinese tourist boom, which started in 2004. As a result, there will be more transactions involving mid-market brands occupying former luxury brand shops, in core locations, in the coming years – and will become the “new normal” in the Hong Kong retail market.”
