Short-term agreements bolster Hong Kong's retail leasing activity

Vacancy pressure gradually eased in most core retail areas as many short-term leases were recorded.

The drastic plunge in visitor arrivals to Hong Kong has extended to 4Q20, as the city continued to be battered by COVID-19 over 2020. JLL notes that domestic consumption sentiment revived moderately as the pandemic eased and social distancing measures were loosened in October. Total retail sales declined by a lesser margin to 6.4% y-o-y in October-November, the first single-digit decline since 2Q19.

Leasing activity saw a mild pick-up during the quarter, sustained by demand from short-term leases of mask retailers and seasonal trades in core retailing areas. Meanwhile, retailers targeting local consumption, in particular, F&B operators and sports equipment retailers, continued to drive leasing momentum.

Kwun Tong redevelopment project completes in 4Q20

The Kwun Tong Town Centre ph2-3 in Kwun Tong, jointly developed by the URA, Sino Land and Chinese Estates, is expected to obtain its occupation permit in 4Q20. Despite a relatively low pre-commitment level, the project is targeted to open in April 2021 and will add about 180,000 sq ft to total retail stock.

The government launched the open tender for New Central Harbourfront Commercial Site 3 (IL 9088) in Central under a two-envelope system to add an estimated 1.1 million sq ft of prime retailing floor space. The tender will close on 18 June 2021.

Investors eye opportunities in anticipation of market revival

Vacancy pressure gradually eased in most core retail areas as many short-term leases were recorded. Net effective rent of high street shops stayed on a downward trajectory, albeit at a slower pace of -4.4% q-o-q, resulting in a hefty -36.8% y-o-y drop. Meanwhile, boosted by short-term incentives given by landlords, the rental drop in overall prime shopping centres slowed to -3.6% q-o-q.

Based on preliminary figures, investment volume of properties, priced over USD 5 million, decreased by 9.3% q-o-q to HKD 5.8 billion in 4Q20, this was largely due to the presence of a few notable redevelopment acquisitions in 3Q20. Despite the dip in sentiment, the investment market has seen a pick-up. In line with rental drops, capital values of high street shops retreated by -3.2% q-o-q in 4Q20.

Outlook: Early signs of recovery in the retail market

Assuming a modest return of visitors on the back of the pandemic being contained, total retail sales are likely to rebound. We maintain our forecasts for overall and premium prime shopping centre rents to trend up 0-5%, respectively, for full-year 2021. The rental forecast for high street shops has been revised to +0-5% from +5-10%, assuming inbound tourism will revive later in 2021.

We expect a higher deal flow for retail assets on the back of quantitative easing and the abolition of doubled stamp duty on non-residential properties. As a result, capital values of high street shops in the core retailing areas will likely increase by 5-10% in 2021; market yields shall compress moderately over the next 12 months.

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