Weak retail sentiment drives down shop rents in core areas by 15.7%

Decline decelerating after 3Q15 slump, though.

Weak retail sentiment in Hong Kong drove down retail shops rents in core areas by 15.7% in the first nine months of 2015.

According to a release from CBRE, it expects that rents will continue to decline in the coming months, but at a milder pace with a forecast of a 20- 25% drop y-o-y for 2015 and a 15% decline y-o-y for 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, CBRE Hong Kong.

Here's more from CBRE:

The most recent quarter saw the largest quarterly decline recorded since Q1 1998, with a 9.1% q-o-q slump in overall rents 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.

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% y-o-y decrease (and a 22.9% y-o-y drop in September alone). According to CBRE’s latest 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 Street and Queen’s Road Central—areas that have benefited from this 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 Road 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 postChinese 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.