Hong Kong high street shop rents to decline by up to 40% in 2020

High street shop rents fell 10.1% in Q2 amidst the hiking vacancy pressures.

According to JLL, inbound tourism has completely stalled, with visitor arrivals down to a historic low of about 4,000 in April. While tourist spending was effectively absent, domestic consumption remained the only source sustaining sales. Retail sales fell 34.4% y-o-y in April and May, after contracting 35.0% y-o-y in 1Q20. The drop is expected to narrow as the city emerges from the virus outbreak.

Leasing activity in the core areas was limited, with many short-term leases recorded at a fraction of the previous rent. Some prime flagship space has been returned to the market, after worsening sales spurred more closures among luxury retailers. Mass-market lifestyle retailers and F&B operators were still keen to expand on the back of a more affordable rental level.

Here's more from JLL:

Market awaits another iconic site in Central

No prime shopping centres were completed in 2Q20. ‘Kwun Tong Town Centre ph 2-3’ project is expected to obtain its occupation permit in 4Q20, with a targeted opening in early 2021. Owned by the Urban Renewal Authority, this five-storey complex shall add about 180,000 sq ft of prime retailing floor space to the market.

According to the government land sales program, the New Central Harbourfront Site 3 (IL 9088) in Central is scheduled for tender in 3Q20, capable of yielding up to 1.1 million sq ft retail floor area. A ‘two-envelope’ approach will be adopted for its bidding, where design quality and price bids carry equal weighting.

Strong vacancy pressure pushes rents down

High street shop rents retreated by 10.1% q-o-q in 2Q20, as landlords’ stance further softened amid the hiking vacancy pressure. Prime shopping centre rents stood firm during the last downturn, leaving room for possible further contraction. As such, the drop in overall prime shopping centre rents accelerated to 12.0% q-o-q in 2Q20, while premium prime rents fell by 13.3% q-o-q.

In tandem with rents, capital values for high street shops dropped by 9.0% q-o-q in 2Q20. Investment sentiment saw a mild pickup in 2Q20, with transaction volumes for properties priced over USD 5 million rising 7.7% q-o-q to HKD 6.2 billion, bolstered by a few large en-bloc deals.

Outlook: Strong turbulence lies ahead in the near term

The ongoing pandemic, strained international relations, together with the weak economy will likely remain as sources of uncertainty in the near term. With tourism unlikely to undergo a revival any time soon, we have adjusted down our forecast across all asset classes, with high street shop rents and overall prime shopping centre rents to fall 35-40% and 25-30% for the year, respectively.

Investors continue to look for assets with stable returns, as such we expect interest would shift further into non-core retail markets. Meanwhile, capital values of high street shops in the core areas should fall by 30-35% in 2020, reflecting the slipping rental outlook. Yields are expected to remain largely flat, as large risk premiums are offset by lower funding cost due to quantitative easing.

Note: Hong Kong Retail refers to Hong Kong's overall prime shopping centre and high street retail markets.