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Always on sale
Retail real estate remained the strongest sector in the city throughout the recession, holding up much better than both commercial and residential property. Alex Frew McMillan reports
Amid all the hand wringing about the meltdown in world financial markets, it won’t have escaped visitors to most shopping malls in Hong Kong that there’s still plenty of cash ringing through the registers. It was mainland Chinese shoppers who effectively lifted Hong Kong out of its last recession in 2003, when the central government freed up travel restrictions from major Chinese cities. And this pattern has repeated itself.
Using Hong Kong as a bit of a test market for individual travel out of China – all trips previously had to be organised by state-sanctioned travel agents – gave the city’s merchants and restaurants an all-important boost. The flood of new visitors that began in the second half of 2003 put an end to the downturn caused by SARS.
So with the People’s Republic having just celebrated its 60th anniversary, it’s not a bad idea to take another look at what’s happening on Hong Kong’s bustling shopping streets. If China, and by extension Hong Kong, are going to stand up for themselves economically, “domestic demand” is going to be vital. In other words, with U.S. consumer confidence still taking a hit, we need help from Main Street China instead of Wall Street.
There has been a lull in the stores in Hong Kong, of course. But this didn’t last long. It’s easy to say in retrospect, but the fact that crowds kept going to malls and restaurants said a lot for the strength of the economy in Hong Kong during this recent downturn.
“Events over the past year have confirmed our long-held view that Hong Kong’s prime retail property sector is highly resilient,” Knight Frank stated in a report in September. “Even at the height of the crisis in the fourth quarter of 2008 and the first quarter of 2009, there were waiting lists for shops in Hong Kong’s premium shopping malls like Harbour City in Tsim Sha Tsui, Festival Walk in Kowloon Tong and New Town Plaza in Sha Tin.”
Data put together by Xavier Wong, the director and head of research at the real estate brokerage’s Hong Kong office, and research manager Pamela Tsui shows that Grade A office rents dropped 41.3 percent from the top of the market to the bottom. Luxury residential rents fell 32.9 percent. But rents for stores in prime locations only fell 11.4 percent. They started to recover in May – office rents, by comparison, continue to fall.
Rents for top-end stores have clawed back 10 percent of those losses, and some prime locations have already climbed above the levels prior to Lehman Brothers going bust in September last year.
It’s not only high-end locations or luxury brand stores that are demonstrating these kinds of trends. “The market is aligning as rentals begin to taper off, and small- to medium-size local retailers are more active in acquiring new sites for expansion,” Colliers noted while examining local retail property trends in September.
Why the retail resilience? Like all real estate in Hong Kong, owners of storefronts have been encouraged by the stock market rally both in Hong Kong and in China. Landlords typically haven’t been carrying large debt loads and have been able simply to hold on to their stores rather than being forced to sell.
But those mainland visitors that get so much stick from people in this city also deserve a lot of praise. As do you. Knight Frank credits “relatively stable mainland visitor arrivals and better-than-expected local retail sales.”
So if you’ve taken your mind off the Western financial crisis by engaging in a little of Hong Kong’s national sport, shopping, well done. Pat yourself on the back, and maybe your wallet, too. Crisis? What crisis? It seems only sickness can dampen the city’s enthusiasm for browsing the stores. SARS and swine flu have been the main influences in any hit stores have taken.
“Private consumption has remained relatively resilient since the onset of the global financial crisis a year ago, although there has been a short-term decline, especially in the second quarter of 2009 due to the outbreak of the H1N1 flu virus,” says Simon Lo, the director of research and advisory at Colliers.
While renting stores hasn’t proved particularly cheap throughout the financial crisis, smart shoppers could have picked up a few bargains. The average price of high-end retail stores fell 33.2 percent in the eight months through February. But the fire sale may truly have been one-time-only. Capital values have since shot back up almost 30 percent since bottoming.
The reason behind that rebound is that banks turned the credit back on, particularly in the second quarter of this year. That’s reflected in the sheer number of stores changing hands – from a miserly 429 shops for sale in the first quarter of 2009, three times that amount – 1,317 – sold from April through June.
The number of flagship stores changing hands showed a similar trend. For retail store transactions worth more than HK$100 million – think multiple stores or whole floors of shopping centres, maybe even entire shopping centres themselves – the number of deals rose from just two in the last three months of last year to 14 in the second quarter of 2009. And, in a nice piece of symmetry reflecting who may go into the stores that just changed hands, Knight Frank says, “A considerable number of these buyers were from mainland China”.
The increase in shop shoppers sniffing around for bargains means that it’s hard to find a good deal anymore. “Towards the end of the second quarter, almost all high-yielding shops had been snapped up and many prime shops in core retail areas had been absorbed, forcing buyers to expand their search to second-tier locations,” Wong and Tsui say.
That has driven yields – the percentage of the purchase price that a property buyer can expect to make back in the rent for a year – down from 4.8 percent in November 2008 to 4.2 percent in July 2009. Some high-end shops were changing hands for yields as low as 2 percent, with the new buyers figuring they can lock in a big increase in the rent when the store tenants next renegotiate their lease.
There’s another national pastime in Hong Kong, of course, that rivals shopping. If you’re done shopping, or for some crazy reason don’t like it that much, it’s always time to eat. Restaurants may lead the way as the city marches out of recession, a move expected to gather strength in 2010.
“Of all the sectors [in retail], we expect food and beverages to take the lead in growth,” says Helen Mak, the director of retail services at Colliers. “Hong Kong has a strong dine-out culture. Consumers have adjusted down their spending, but they do not change their habit of eating out. Such habits sustain the growth of F&B, which has in fact remained active for the past year.”
Pedants might pick up on the fact that people do adjust their habits – most Hong Kongers are eating at Café De Coral rather than Petrus and Caprice. So restaurants that were on their last frog’s legs have not been able to survive. But supermarkets and the broader food category (including restaurants) were the key growth areas from January to July this year.
One area of retail that has not shown great resilience is high-end fashion from international chains. Not surprisingly, these brands are under pressure in other markets and reluctant to pursue their once-aggressive expansion plans in greater China. But with mild inflation of around 2 percent expected next year in Hong Kong, retailers are likely to make greater profits in this part of the world than they’re likely to see elsewhere. And local merchants don’t seem to have such qualms.
“In recent months, we have received more enquiries, which shows local retailers have regained confidence in the market,” Mak says. “They are more certain to go ahead with their business plan or commit to a new lease.”
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