Retail Landscape On The Verge Of ReinventionWe’ve all been there. You move into a new neighbourhood and discover a fabulous deli or pet shop. All is well for a few months then just like that — it’s gone. Turns out the rent went up too much for the small business to bear and it’s closing time.

For a while it looked like soaring retail rents were killing the independent entrepreneur, but things have taken a turn in the crucial retail sector lately. So much so that core districts like Causeway Bay and Tsim Sha Tsui could look very different in the next decade than they did in the last.

Retail Lifeline
Retail sales (property and merchandise) and leasing are critical to Hong Kong’s overall health in general, a product of progressing to a service economy. Aside from retailing’s importance to brands and tenants, it’s vital, “Just for the local population. We don’t have manufacturing and every year over 200,000 young people graduate from secondary school and not all go to university,” begins Helen Mak, Colliers International’s senior director of retail services. “How do we accommodate the livelihood of 80,000 graduates? Fortunately we have retailing.”

Joe Lin, executive director of retail services at CBRE Hong Kong agrees. “Retail is the most important industry to the GDP. We don’t have industry or raw materials. For 40 years Hong Kong was known as a shopping paradise. Chinese travellers were not yet allowed to come here but Taiwanese, Japanese, American and European tourists shopped here. It’s a small city with no consumption tax … So apart from real estate and finance it’s the most important industry in the city. It affects the employment rate and a bunch of the side businesses.”

For the last decade, following the implementation of the individual visitors scheme, Mainland tourist arrivals and their spending patterns have been the key drivers in the retail sector. “They spent a lot on luxury goods, high-end fashion brands, and it was a surprise to Hongkongers. Sometimes they spent $1 million per visit. So the high street retail went after this market segment and tried to provide what they liked,” explains Lin. The result was more jewellery and upmarket fashion outlets, in turn creating the momentum that pushed up rents.

June research by Knight Frank estimated same day Mainland visits are rising, overnight stays are dropping and the fastest growing period for IVS arrivals and corresponding retail sales is in the past: the peak hit between 2010 and early-2012. Luxury goods sales are dropping in the wake of a slowing Chinese economy and shifting consumption patterns. In addition, South Korea, Singapore and Taiwan are actively courting Mainland tourists. As demand for retail space wanes, rents have peaked and are predicted to gradually drop in the coming years.

Cleaning House
A great deal of the changing consumption has to do with China’s anti-corruption policies. As Mak sees it, China’s entrenched gift-giving tradition has luxury shoppers on their guard and almost everyone else in a holding pattern. The sweeping corruption clean-up, initially assumed to be for show, has turned out to be considerably more substantial and it’s put a halt to extravagant shopping. And because IVS visitors are creeping into the majority, “They’re not here to spend $1 million. It’s a different shopping experience — for everyday necessities, personal care, food items,” she says. “The market went into a wait-and-see [mode]. But in the last 12 months it became clear it was not temporary,” echoes Lin “It will inevitably affect the rental rate growth in Hong Kong. In 2011 the overall rental growth in prime retail districts was 29 percent, and that was the average — not the highest. Last year the increase was only 7 percent. This year we expect it to be stable, meaning 0 percent. On secondary streets rental rates will drop 10 to 15 percent.” Expansion by major retailers is on hold, and even secondary streets have lost some of their charm.

“[Hong Kong’s] role in the last 10 years was as a window into China … The market is saturated here and there’s limited supply,” notes Mak. “But now the brands go to China first despite it being more difficult. There will be a second wave of adjustment but it won’t happen in the short term.”

Home Grown
So does that mean there will be more room in prime spots for local brands — all those independent businesses — and mid-range product? Perhaps. Lin doesn’t expect to see rents in prime locations to significantly overnight; they should remain high, as space is limited. However, “Landlords in secondary streets will become more flexible. They’ve been rigid in the last few years believing an international brand would lease their shops. But in the last six months we’ve seen more and more vacant shops in secondary locations. They’ll have to cut the rent or those spaces will stay vacant,” he states. Secondary streets include the likes of Lan Fong Road or Percival Street in Causeway Bay and the tiny avenues off major high streets. Mak goes further, theorising that small shops and local retailers have vanished from expanding retail cores because their specialised goods are not on tourists’ radar. “When Hongkongers first started travelling to Tokyo it was all Ginza. But now they’ll take an hour drive from the core to find more cultural, localised stuff. It’s a process.” Whether those secondary spots create mini-hubs for more accessible products will only become apparent years down the road. “IFC was not considered ‘core’ Central when it went up … Retail development takes ages to really become a hub,” she says.

Retailing could be on the verge of a shake-up too. Mak points out Hong Kong is as renowned for its food as for its shopping. With key Mainland tourists also heading to the United States and Europe for more comprehensive travel experiences and online shopping still growing, food could be the future of retail. “The restaurant business is not affected by online shopping and tourists can’t take it home. No one says, ‘Helen, can you bring me sushi from Ginza?’ There’s nothing you can’t get in China anymore, so we need an edge.” It also helps that the city’s local food culture is inherently supportive of F&B.

Mak expects that in another decade the core districts will look drastically different than they do now, and despite the seeming futility, there will indeed be space on the SAR’s shopping landscape for the little guy and frugal multinationals alike. “Hongkongers will find new places to shop,” finishes Lin. “Russell Street and Canton Road are no longer shopping destinations for locals so when shoppers change their habits, the brands will follow suit.”