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Retail haven
It seems counterintuitive that retail real estate would outperform during an economic slump. But for the time being at least that appears to be exactly what is happening, says Alex Frew McMillan
"Half of the 88 markets around the world that CB Richard Ellis surveyed saw retail rental growth in the past year, and 65 percent of them saw increases in the last six months"
Many real-estate professionals say they would pick retail real estate as the safest bet for investors during the current market downturn. “Standing retail [real estate] is the one thing that you can justify,” says Nicholas Brooke, the chairman of Professional Property Services. “There has to be intra-Asian consumer demand.”
For Brooke, high-street retail stores in areas such as Causeway Bay and Nathan Road are probably the safest places to buy in the current environment. “I personally wouldn’t go much further than retail,” he adds.
Goodwin Gaw, the chairman and co-founder manager of Gaw Capital Partners, agrees, particularly when looking at retail in China. “We like the retail sector quite a bit,” he says. “The next phase of China’s growth is going to be domestic consumption. I think government policy will be there to stimulate consumer demand.”
Gaw favours city centre retail rather than US-style big-box sites on the outskirts of cities. For instance, Gaw Capital is a co-owner of The Village at Sanlitun in Beijing.
“Despite deteriorating economic conditions, the retail sector has to date continued to perform relatively well,” the brokerage CB Richard Ellis (CBRE) writes in a recent report.
Half of the 88 markets around the world that CBRE surveyed saw retail rental growth in the past year, and 65 percent of them saw increases in the last six months.
Hong Kong has some of the most expensive retail space in the world, of course – but not the most expensive. That honour falls to New York and Fifth Avenue, where the rent is US$2,200 (HK$17,064) per square foot per year. That is 75 percent higher than Hong Kong, which is the second most expensive place in the world to rent retail space, at US$1,236 per square foot per year.
Moscow, London and Tokyo come next. But retail rents fell 5 percent in the past six months in both Tokyo and Madrid, whereas Hong Kong ranks 10th in terms of retail rent increases, behind Tel Aviv, Oporto, Abu Dhabi, Valencia, Bucharest, Lyon, Guangzhou, Miami and Shanghai. Hong Kong’s retail rents rose 11.1 percent in the past six months.
Seven of the top-20 most expensive shopping cities in the world are in Asia. The average retail rental in Guangzhou is US$493 per square foot per year.
“The scarcity of prime units continued to push rental increases in many markets, with Guangzhou, Shanghai, Hong Kong and Singapore all registering growth over the past six months,” the CBRE report states. “Guangzhou continues to be the most expensive Chinese city, having jumped significantly in the ranking from 22nd in the first quarter of 2008 to 13th in the current ranking.”
The EMEA region - Europe, the Middle East and Africa - continues to dominate the ranking, with 33 of the top 50 most expensive retail locations.
The cheapest city for retail rents of the 88 markets that CBRE surveyed is Manila, where space rents at just US$40 per square foot per month. That’s similar to the US$45 rate in Panama City and the US$47 in Santiago, Chile.
As China develops its own economic problems, the retail sector may start to face hard times, too.
“The retail sector has held up relatively well to date, but it also is set to see a major slowdown in many markets as consumer spending wanes and unemployment rises,” Jones Lang LaSalle (JLL) states in a report.
According to Merrill Lynch, the unemployment rate is rising in Hong Kong thanks mainly to job losses in the retail trade, transport, import/export trade and hospitality sectors. It stands at 3.5 percent now but is likely to climb to 5 percent in 2009. That is still lower than the 8.5 percent it hit during SARS, the worst unemployment rate in Hong Kong for two decades, and the 6.3 percent during the 1997-98 financial crisis.
“We think Hong Kong, this time, is unlikely to reach those levels mainly because the labour market structure is quite different from the 1997-98 episode,” economist Ting Lu and research analyst Steven Lam of Merrill Lynch note.
Jobs in Hong Kong are now more focused in services, particularly finance, real estate and social services, which are more resilient during economic downturns than manufacturing and exporting.
Merrill Lynch expects Hong Kong’s gross domestic product to decline for the fourth quarter of 2008 and first quarter of 2009, leaving the city with zero growth in 2009.
“This is different from SARS,” Richard van den Berg, the country manager for China at ING Real Estate Investment Management, says. “This is not going to be a V-shaped recovery, it will take longer.”
JLL says, in its Global Market Perspective Report, that the “impact of the storm will continue for a long time” but that large institutional investors are starting to consider this a buying opportunity in Asia. There is “compelling evidence to suggest that a number of large, global insurance firms that have entered the markets in the last 60 days are planning to enter the Tokyo, Singapore and Hong Kong markets in coming months”.
Big retail chains have started scaling back their expansion plans, but luxury brands have still chosen to expand in China, particularly leading up to and during the Olympics last summer.
“In China, with the Olympic Games a major catalyst, there was a noticeable trend towards luxury brand contract renewals in Beijing,” CBRE writes in its Global Market View. “Given limited new supply in prime retail areas and strong demand from international brands, Shanghai’s rental growth remained resilient. In Guangzhou, fashion retailers continued to dominate leasing demand for prime retail space and rents for ground floor retail space in prime retail properties witnessed a slight 0.6 percent quarter-on-quarter growth.”
CBRE believes Hong Kong is ahead of the curve in the retail rental cycle, with rents starting to fall in the city just as they are in Taipei, Tokyo and Manila. Cities such as Singapore, Beijing and Guangzhou are behind the curve, still seeing rental rates increasing but starting to slow.
It notes that the falloff in inbound tourism has affected business sentiment for retailers in Hong Kong. Unlike the largest cities on the mainland, it will be local retailers that will likely push demand in the city.
“As the credit crunch showed no sign of easing in the third quarter and the prolonged global financial turmoil threatens to bring a wave of layoffs to Hong Kong, consumers began to cut their spending, which could possibly drag down economic growth over the next few quarters,” the report states.
“Retail property market activity is set to decline and can only possibly expect to receive short-term support from local retailers instead of high-end international brands.”
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