The luxury retail sales decline in Hong Kong brought on by lackluster mainland Chinese tourist numbers is set to carry on through 2016, according to a new report.
Commercial real estate services firm CBRE’s new report “Hong Kong Commercial Real Estate Review & 2016 Preview” released this week predicts that prime high street retail rents in Hong Kong will have declined by 20 percent by the end of this year, and drop an additional 10 to 15 percent in 2016.
As Chinese tourist numbers declined, luxury boutiques were hit the hardest in an ongoing retail slump this year. Retail rents declined 15.7 percent in the first three quarters of 2015, and the report notes that this was especially concentrated in luxury “high street” areas.
According to a previous CBRE report entitled “The Changing Retail Landscape,” Hong Kong’s implementation of the “individual visit scheme” in 2003 led to a “Golden Decade” for retail sales. Mainland Chinese tourists flocked to Hong Kong to take advantage of lower taxes, a favorable currency situation, wider selection, a good market reputation, ease of access, and language convenience. During this “Golden Decade,” tourist arrivals soared by 292 percent, prompting retail sales growth of 185 percent and overall retail rent increases of 213 percent.
This “Golden Decade” has now come to an end, with sales of jewelry and watches down 14 percent in 2014 and 15 percent in the first seven months of 2015. This is thanks to a variety of factors, including China’s anti-corruption campaign, slowing economic growth, anti-mainland hostility, and travel and tax policy changes. In addition, a host of other retail destinations including Japan, South Korea, and Europe are heavily competitive with Hong Kong thanks to currency fluctuations, easier access through direct flights, and strong marketing efforts to attract Chinese travelers.
There have been several key consequences as retailers and landlords recalibrate. As some luxury brands opt to shutter stores entirely instead of renegotiating rents, sportswear and mid-market labels are moving into previously luxury locations. The report notes that while “tier 1” occupancy is still high, “tier 2” retail locations are seeing growing vacancies. This has caused landlords to scramble to offer lower rent prices and become more flexible with retailers in order to keep them from leaving.
Looking past 2016, CBRE doesn’t see much hope for a quick rebound. The decline “is structural,” and thus “will not be reversed in the near future.”
The firm offers several key pieces of advice for retail landlords in this environment. Mall landlords and street shop landlords both need to exhibit more flexibility with retailers. In malls, that means being more flexible on shop size, while street shop landlords should be more flexible with terms.
On the flip side, luxury retailers also need to adopt certain strategies to cope with the Hong Kong slowdown. CBRE recommends that they “introduce new products at more accessible price points in response to the structural shift in demand away from luxury goods to mid-range items.” During the low season, they should review their leasing strategies and put more resources into their most profitable shops, while upgrading their best locations.