Hong Kong retail rents decline ‘will continue’

Hong Kong retail rents are set to continue to decline for the remainder of the year according to two new assessments.

DTZ/Cushman & Wakefield’s head of business space, Hong Kong, Kevin Lam, says rent pressures will be greatest in Causeway Bay, reflecting the “rental correction due to the bigger surge in the district in the past few years”.

“Retail rents are still falling but at a slower pace, and we expect the trend to continue into the second half of 2016,” he said in the company’s half year commercial rent review.

And rival real estate company CBRE concurs: “The rental downcycle is set to continue for the rest of 2016,” the company concluded in its Hong Kong Commercial Real Estate 2016 1H Review & 2H Outlook.

As retail sales continued to decline across the territory in the first half of this year, retail rents followed suit.

“Rents have come down 6.8 per cent in the first half of 2016, and [we] have seen an aggregate decline of 23 per cent from the peak levels. Rents in Tsim Sha Tsui plunged 10 per cent in the first half, mainly due to more expiries in TST this year than last year,” said CBRE.

“Landlords’ stance continued to soften, but with some major vacancies digested, rental pressure was slightly eased.”

Leasing activity actually picked up in the second quarter, with some brands committing to spaces in strategic locations while some others relocated to save costs. More short-term leases were witnessed in the second quarter.

CBRE predicts that with rising concerns over job security, discounting “is inevitable” to drive local spending.  Further, the depreciation of the RMB will further discourage mainland tourists to shop in Hong Kong, while the stronger dollar will raise the attractiveness of shopping in Europe.

“The retail landscape transformation from luxury retailers to mid-range/mass market brands will continue.”

DTZ/Cushman & Wakefield observed that the easing of the decline in both Mainland Chinese visitor volume and retail sales cast a positive light on the trend of retail rents.

“High street shop rents in Causeway Bay, Tsim Sha Tsui, Central and Mongkok recorded a quarterly fall between 3.6 per cent and 5.1 per cent, which was on a lesser scale than in the first quarter when the average rents in these districts dropped by 5 to 7 per cent.

Lam said that with landlords being more realistic, the bigger drop in rents in Causeway Bay favoured the taking up of vacant street shops, causing the vacancy rate to improve from 5.3 per cent in the first quarter to nil in the second.  

“Vacancy in Tsim Sha Tsui remained stable, while the number of vacant shops has increased in both Central and Mongkok during the course of the second quarter.”

On the other hand, the food and beverage sector, which has been witnessing stable rental growth since 2010, began to show signs of concern: Chinese restaurants recorded a drop of 0.5 per cent in year-on-year sales in the first quarter – the first drop over the course of the past six years.

“With the slowdown in business, Chinese restaurant operators became much more cautious than at the beginning of 2016 and they generally have less desire in expansion in the second half of this year. This quarter, F&B rents in Central dropped 0.1 per cent from the previous quarter.

“Although this is statistically mild, it is an indication that F&B rents are perhaps close to the ceiling, and the sector will be trending towards a plateau or even trending downward should the local economy deteriorate.”

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