Predictions in January were for a wobbly year for residential property investment. For end users and up-graders, 2012 could be a good one, but for investors, hotels and retail was where the smart money was heading. Buoyed by strong tourism (42 million visitors in 2011, a record high for the third year running), Hong Kong’s retail sector is thriving. On a per square foot basis, Causeway Bay is home to the most expensive retail property in the world. All those tourists, the majority of them from Mainland China, were doing right by the SAR’s retailers — and retail landlords.
However, break down the spending patterns and one fact pops out: with the exception of tourist-driven Tsim Sha Tsui local spend dominates the retail hubs. “It’s more driven by supply and demand. If you look at the spend in Causeway Bay, it’s approximately 60 percent local, 15 percent Mainland tourists and about 25 percent [other] Asian nationalities and other tourists,” explains the National Director, Head of Retail for Jones Lang LaSalle, Tom Gaffney. Mainland tourists driving the retail sector is a bit of a myth but the growth of Causeway Bay is not. “We foresee a huge change in Causeway Bay in the coming years, the next three or so. You’ll likely see a lot of developers making inroads to make Causeway Bay into the Tsim Sha Tsui of the Island … You look at the improving infrastructure in Causeway Bay and a lot of developers are looking at converting their existing assets to have more of a retail slant. They’re trying to drive that 15 percent Mainland tourists up to 20, 30, maybe up to 40 percent,” Gaffney finishes.
But tourism does play a large part in the current health of the retail sector. The idea is simple. Rents are going up because tourists come to spend cash on luxury items, which drives up sales, which drives expansion in a market with limited supply. Gaffney doesn’t see things slowing down too much either. Hong Kong’s perfect storm of accessibility, no sales taxes and the confidence in credibility of the product will keep the city a shopping destination. The misfortune in the US and Europe is actually a boon to Hong Kong, uncharted waters for many brands and a growth region. “All these brands are looking at their 2012 and saying, ‘Hey, 25 percent y-o-y in Hong Kong’ and they’re using it as a launch pad into China. They all want a fantastic presence in the cool districts,” Gaffney states.
But according to CBRE’s first quarter Asia Pacific Viewpoint for retail, sales in Asia were weakening, Japan excepted. CBRE found consumers feeling cautious, and though China and Singapore reported healthy sales over Lunar New Year, value growth in Hong Kong dropped during the same period. CBRE also concluded retailers were only slowly expanding, partly due to limited space, but backed up Gaffney when it stated major international luxury brands were expanding and entering new markets—and were focused on Hong Kong and China.
So how does one get into retail investment? Can single investors dabble or is retail only for the LVMH’s of the world? “Yes, individuals or consortiums can enter the market and this sector of the market is quite active. A lot of people either use their own individual wealth to buy or trade retail shops or alternatively pool their money together in a company set up and buy through the company,” Gaffney remarks.
So what does the landscape look like? Big brands can afford big rents so where is the local product (that speaks to local shoppers) going to go? Rents are already stiff in the major shopping corridors at TST, Causeway Bay, Central and Mongkok. Will high rents lead to a fifth or sixth as yet unidentified shopping hub?
“That’s a good question. Rather than new districts emerging, the four core districts will expand. A lot of those small retailers still want a presence in Central, which is morphing into SoHo. The smaller groups that can’t afford Queen’s Road or Pedder Street are going into Stanley or Wellington. They’ll get the same crowd, the same exposure at one-third the rent… The difference between Admiralty and Central is almost gone.” The main corridor from Queen’s Road West traversing all points to Queen’s Road East has the potential to become the world’s longest 5th Avenue.
Metamorphoses are likely the key to the future. Gaffney describes the symbiosis between district, accommodation and retail. “If you actually look at growth sectors which in turn fuel the Causeway Bay story, one is Causeway Bay. You’re seeing a lot of conversions from office buildings to serviced apartments or three- to four-star hotels. This is where tourists are staying … The number of serviced apartments and hotels coming online in the near future will really cause Causeway Bay to become that Island TST.”
The story is similar in Mongkok, until recently the poor pledge of the shopping fraternity. “Langham has definitely been a transformation in the district. For the sheer number of people and the spending power in Mongkok … it would be stupid for any brand not to be there,” Gaffney points out. Mongkok will transform along the lines of Wanchai — a little down and dirty, a little swish — and in five years will be more cosmopolitan and upmarket. “Brands that are looking there would have laughed five years ago, and now they’re all taking 20,000 square feet.” Then there’s the inevitable evolution of the Kowloon Bay area, the rumoured CBD2 and the new cruise terminal, allegedly with a significant retail component.
Crammed as it may seem, there is room for retail space growth in Hong Kong. Many international brands haven’t set up shop yet (Abercrombie & Fitch just found space), and as Gaffney sums up, “And really? Shopping is a pastime in Hong Kong. That’s not going to change.”