Hong Kong: Retail

Demand

The number of tourist arrivals continued to display strength in January-February, growing by 14.1% y-o-y. Tourist arrivals from Mainland China also grew steadily at 17.2% y-o-y in the same two month period. Despite the steady growth of tourist arrivals, retail sales growth slowed to 6.6% y-o-y in January–February, compared with 6.8% y-o-y growth recorded in 4Q13. Sales of jewellery and watches grew by 5.3% y-o-y, which was the weakest growth for the segment since 2009 albeit off a higher base of comparison.

Prime shopping locations continued to draw considerable interest from international retailers despite slowing retail sales growth. Watchmaker, Rado, renewed the lease on its 600 sq ft shop on Percival Street in Causeway Bay for around HKD 2.2 million per month, a unit rent of HKD 3,667 per sq ft per month. Likewise, MCM renewed its lease on a shop (8,547 sq ft) in Entertainment Building in Central for around HKD 3.5 million per month, paying 75% more from its 2010 lease.

Supply

No prime projects were completed in 1Q14.

The construction of the Maritime Square extension in Tsing Yi will commence in mid-2014. This prime project, with direct access to the MTR Tsing Yi station, will provide around 130,000 sq ft of retail space spread over four floors when completed in late 2017.

Asset Performance

Retail rents continued to register marginal growth, with both High Street Shops and Prime Shopping Centres rents edging up by less than 1% q-o-q in 1Q14.

Investment volumes picked up noticeably, with investors showing more interest in properties in core locations. For example, CSI Properties purchased a ground floor shop on Percival Street for HKD 185 million or HKD 925,000 per sq ft, representing a yield of around 1%. Capital values for High Street Shops were largely stable, up by 0.3% q-o-q.

12-Month Outlook

The Hong Kong Tourism Board estimates that visitor arrivals will grow by 8.6% in 2014, reaching a total of 59 million visitors. Tourists from Mainland China are expected to continue to register strong growth, increasing by around 10%. Retail sales should grow at a slower rate due to a higher base of comparison and the on-going changes in the consumption patterns of Mainland shoppers. With growth slowing, retailers are expected to remain selective about their expansion plans. Therefore, we maintain our forecast that rents are should grow by 0-5% in 2014. The consensus among economists is that the US Fed is likely to start increasing interest rates in spring 2015. However, we believe the increase is likely to be small and carefully paced, therefore low financing costs and prospects of rental growth should provide support to capital values. We forecast capital values of street shops in prime locations to remain stable in 2014, growing marginally by less than 1%.

Note: Hong Kong Retail refers to Hong Kong’s Overall Prime Shopping Centre and High Street retail markets.