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savills blog: the road to recovery

The Road to Recovery

With Hong Kong’s retail figures improving on most fronts, the questions become ones of how we got here, and what comes next.

What a difference a year makes. Not too long ago, November 2016 to be exact, Hong Kong’s retail landscape was looking decidedly barren. Luxury goods sales were still well below peak 2013 levels, fashion sales in general were at a nadir, and crucial visitor arrival numbers were still down.

Jump ahead to November 2017, and the picture looks much different. Sales volumes of luxury goods are, on average, up across the board by 5%, fashion numbers are still down, but off by just 0.5% rather than the double digits of previous quarters, and retail sales in general crept up by 1.8% year-on-year. While those statistics pale in comparison to the record-setting levels of the past, and there are still too many vacant storefronts in SoHo and Causeway Bay, upward trending key indicators provide reason to be cautiously optimistic about Hong Kong’s retailing future.

savills blog: the road to recovery

 

Some perspective is needed with regards to the SAR’s retail performance of late. Anything below the whopping 86% sales volume growth recorded between 1997 and 2016 (topping out at over HK$430/US$50 billion) is going to appear tepid, at least on the surface. During that same period, global-leading retail rents in high street shops and shopping centres were, by some standards, out of balance and bound for recalibration. Add to that the city’s primary source of retail activity — visitors from the PRC — becoming entangled in an anti-corruption campaign in the Mainland and Hong Kong found itself a recipe for the kind of retail reinvention that is underpinning the current resurgence and positioning it for the long term.

Read more: Shopping malls as destinations for eSports events in Hong Kong

Tourist numbers have been climbing, and in October 2017, the city welcomed over 5 million visitors, a 6.6% increase year-on-year. That was the strongest rate of growth since March, and most crucially, 75% of those visitors were from China for an 8.3% increase from the year before. Overnight PRC visitors spiked 10% (despite ongoing caps on cross-border travel), an encouraging number, as the average spend for overnighters is two to three times that of day visitors.

Until those recent improvements, weak tourist arrivals slowly but surely began to influence how landlords and tenants entered into negotiations. A year ago, landlords holding prime retail space were still unwilling to bend on rental rates. Now, especially in prime locations such as Causeway Bay and Tsim Sha Tsui, both parties have proven more open to agreements that are mutually beneficial — one that secures a long-term tenant for the landlord and the time to cultivate a customer base for the tenant, more and more often traffic-generating F&B outlets or brands new to the city that are taking advantage of a more welcome retail property environment.

 

Taken in conjunction with improving domestic consumption, these signs bode well for retailers. Watch and jewellery sales were among the leaders for the period, measuring sales improvements of 7.9%, along with medicines and cosmetics at 12.5%, and 3.5% in what the Census and Statistics Department (C&SD) calls wearing apparel. With the aforementioned rental compromises, many international brands that had yet to establish a presence in Hong Kong — watchmaker Daniel Wellington, accessories brand Dooney & Bourke, contemporary UK clothier Whistles — and targeted local expansion and refocusing (like Lane Crawford’s younger-skewing Lab Concept) are creating a better, richer retail environment from the consumer perspective. That needs to continue if Hong Kong retailing is to recover fully.

 

While the fashion industry continues to struggle, trendy brands and ‘affordable luxury’ are still performing well, which could be attributed to the property sector’s reconfiguration.

Not to be outdone, F&B remains Hong Kong’s most promising retail sector, due to (as with fashion) international brands finally getting an opportunity to open, as well as local experimenters — Tipsy in Tai Hang, La Piola in Wan Chai, Beet in Central, Papi in Causeway Bay. The added security of a healthy stock market giving locals the confidence to spend and tourists increasingly making dining outlets a destination of their own, F&B is likely to stay a key contributor to Hong Kong’s retail rebound. In the C&SD’s words, “The near-term outlook for retail sales remains positive, as consumer sentiment is buttressed by the favourable employment and income situation, and as inbound tourism continues to recover.”

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Nick Bradstreet

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