Hong Kong retail rents to grow by 5% in 2024

The market continued to see signs of recovery in Q3.

According to a recent Savills report, the first summer break without border restrictions since 2019 saw a continued retail rebound in Hong Kong in the third quarter of 2023. Top luxury brands experienced remarkable growth, with many reporting sales surpassing 2019 levels and, in some cases, even outperforming their 2018 figures. 

“This surge can be attributed to a substantial price difference of up to 20% between Mainland China and Hong Kong for top luxury products. Additionally, a significant portion of international brands witnessed sales returning to 80% to 90% of their pre-COVID (2019) levels,” the report said.

Here’s more from Savills:

However, despite these positive indicators at the top, the overall retail industry did not see any substantial growth compared to the previous quarter. This was influenced by rising interest rates and mortgage payment which squeezes local household disposable income for miscellaneous goods and entertainment. 

Moreover, the changing spending habits among Mainland visitors and weekend activities of Hongkongers also slow down the retail market rebound. Consequently, many retailers are cautious about expansion due to the slower-than-expected retail recovery. 

While core shopping and dining areas continue to attract new tenants and businesses, small-scale restaurants focusing on the takeaway market have seen a slight reduction. For instance, the "2 Entrees Plate" restaurants thrived during the COVID dining restrictions but now face expiring short-term leases. These potential vacant spaced are needed to be absorbed, especially in suburban residential areas.

Some operators are exploring new business opportunities in prime areas with lower rents, including ventures in the food and beverage, goldsmith, and local fashion sectors. Another retail sector that benefits from tourist recovery is the beauty and health sector. Zakura, a new beauty and health franchise retailer which focused on tourist customers, opened 3 shops in 2023, with all three retail shops being in TST (Granville Road, Canton Road and Haiphong Road), capturing the recovering demand from Mainland visitors. 

As 2023 is coming to an end, these factors will affect operators' decisions and the pace of further retail rental recovery: 

➢ Mainland and local economic recovery 

➢ Residents’ spending pattern in Hong Kong 

➢ Interest rate determining household disposable income 

➢ New retail concepts and themes for locals to engage and explore 

With both Hong Kong and global economies still grappling with challenges, the outlook for retail sales growth may not be as optimistic as anticipated when the borders opened earlier this year. Large retailers are expected to be more cautious and slow down their expansion plans, as they remain uncertain about market conditions. In contrast, smaller retailers could leverage on the low rental environment to acquire prominent retail spaces. As a result, retail rents are forecasted to grow at a modest 5% as we move into 2024.