Research & Forecast Report
Hong Kong | RETAIL Q1 2016
Luxury retailers see weaker 2016 Joanne Lee Associate Director | Hong Kong The Hong Kong retail sector faces tough times, with the strong Hong Kong dollar and weakening Chinese tourist arrivals squeezing sales, especially at the high end. In Q1 2016, sluggish sales were seen not only in the luxury segment, but also in some mid-market businesses. Colliers Research reaffirms its prediction that rents and capital values in prime Hong Kong shops will decline further in 2016, down 10% and 24% respectively. We expect investors seeking yield to show interest in mass-market shopping malls, and recommend owners of retail properties to explore new retail concepts and try to attract a broader mix of tenants.
Retail sales see the biggest drop since 1999 Hong Kong retail sales fell for the twelfth straight month in February. Total retail sales value declined 20.6% year-on-year (YOY) in February 2016 to HKD37 billion after a 6.6% YOY drop in January, data by the Census and Statistics Department showed. This was the biggest drop since January 1999. Combining January and February figures, the value of sales of luxury goods, such as jewellery, watches and clocks, decreased by 24.2% YOY. This was followed by 11.4% YOY decrease in clothes, a 12.3% YOY decline in commodities in department stores, and 7.7% YOY decrease in medicines and cosmetics. Meanwhile, inbound visitors dropped 13.6% YOY during the first two months of the year, in which tourists from the mainland fell 18.0% YOY, according to the statistics from the Hong Kong Tourism Board.
Value of Hong Kong Retail Sales (by type of outlet) -30%
-25%
All Retail Outlets Jewllery, watches and clocks, and valuable gifts
-20%
% change year-on-year
-15%
Food, alcoholic drinks and tobacco
5%
0%
-7.8%
Clothing and footwear
Department stores
-5%
-24.2%
Chinese drugs and herbs
Consumer durable goods
-10%
-13.6%
-10.8% -25.9% -12.3% -2.0%
Fuels
0.0%
Other consumer goods
-6.5%
Supermarkets
0.2% 2015
Jan - Feb 2016
Source: Census and Statistics Department, HKSAR Government
10%
Current
2016F
Overall Rental Index*
80
-9.9%
Central
87
-8.0%
Causeway Bay
74
-10.0%
Tsim Sha Tsui
82
-12.0%
Mong Kok
80
-9.0%
2.5%
50 bps
Yield Index: Nov 2011 = 100 *Street level shops on key street segments Source: Colliers; Rating and Valuation Department
Colliers View
The slowing China economy, structural changes in mainlandconsumer behaviour, weaker inbound tourism and the strength of the Hong Kong dollar are to blame for the gloom in the retail sector, especially at the high end. Stability in the labour market and consistently low unemployment are positive for local consumption and will help mitigate these negative external factors. This is especially in the mass market, but even here there are signs of weakness. Colliers Research does not expect a rebound any time soon and foresees a two-year downward cycle.
More vacant shops ahead amid falling sales Many luxury merchants have painted a gloomy picture for their businesses in 2016. Sluggish sales have prompted them to freeze expansion plans or to close stores. Prince Jewellery & Watch announced it would shut down its 1,800 sq ft store at 51-52 Haiphong Road in Tsim Sha Tsui upon lease expiry in mid-2016, according to Sing Tao Daily on 23 February 2016 . Jeweller Chow Tai Fook said the company expected to close five or six stores in Hong Kong this year, according to Reuters on 8 January 2016. Another jeweller, Chow Sang Sang, had already closed two stores last year – one in Kwai Fong and the other in Causeway Bay – and we think more may be shut down in the near future. Chow Sang Sang hopes to seek rental savings of 20-25% for shops due for lease renewal this year.
Hong Kong Retail Rental Index 140 120 Index (Nov 2011 = 100)
At the same time, other retailers have pressured landlords for rent relief, seeking savings of 30% or more. For example, a dried seafood store renewed its lease at 30 Haiphong Road in Tsim Sha Tsui with a monthly rent of HKD800,000, or HKD1,143 per sq ft based on a gross floor area of 700 sq ft, according to the news posted on 23 February in the Hong Kong Economic Times. This was about 33% lower than the previous tenancy. According to Colliers statistics, Hong Kong retail rents in the traditional top four shopping locations decreased by another 3.9% quarter-on-quarter (QOQ) in Q1 2016 after a full-year decline of 23.7% in 2015. Overall rents have dropped back to the level of Q4 2010.
Stage 1 + 133%
Stage 2 Stage 3 +32% -18%
Stage 4 +70%
Stage 5 -31%
2016F -10%
100 80 60 40 20
Colliers View
Concerns over China’s slowing economy and terrorism threat impacts on travel are exerting pressure on revenues for retailers, international luxury brands in particular. While they are certainly closing underperforming outlets in Hong Kong, some top brands are investing resources to upgrade other stores or venturing into e-commerce channels. This is a strategy that appears to have been adopted by many international luxury brands. On the other hand, mass market retail brands, such as fast fashion and activewear, are likely to fill the vacated space by upmarket brands. With the gradual return of mass market retailers to prime shopping areas, a change in the landscape of major shopping streets is ultimately better for the retail sector because it results in a healthier tenant mix, with different kinds of tenants, not just stores selling luxury items. However, we believe there is not enough demand to compensate for vacated space. More supply is offering alternatives to tenants thereby putting further downward pressure on prime street rents. We reaffirm our forecast that rents of prime high-street shops will fall another 10% in 2016, following a 23.7% decline in 2015. Shopping malls and stores that sell mass market goods are unlikely to be seriously adversely affected by falling Chinese tourist arrivals and structural changes in consumption patterns, since they are supported by the healthy spending of domestic shoppers. Rents in malls, especially those that are not heavily populated by luxury brands, should therefore remain resilient; shops in these malls benefit from the high occupancy rates in the malls and the varied tenant mix. Even in the mass market, however, there are areas of weakness: sales of clothing, for example, have started to come under pressure.
Nov-02 May-03 Nov-03 May-04 Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16
0
Source: Colliers
Yield-hungry investors eyeing decentralised malls Retail sales transactions contracted in Q1 2016 amid the troubled outlook for the retail sector. The total value of transactions for properties priced above HKD30 million dropped 37.6% from the previous quarter to HKD2.6 billion, based on data sources by EPRC. This is far below the long-term average of HKD5.7 billion per quarter.
Colliers View
While Hong Kong retail sales are highly geared to the slowdown in mainland China, the local retail market is more exposed to risks. Capital values of high-street shops in core locations will slide 24% by our estimate in 2016. Retail market yields currently stand at around 2.5%. With capital values falling faster than rents, yields should start expanding this year. We expect investors seeking yield to continue to show interest in shopping malls and stores in decentralised locations that sell mass-market goods. These malls benefit from healthy spending by local residents and stable rental income. We think investors in existing assets should use softening rents as an opportunity to remix or reposition assets. We also see significant appetite for owners of retail properties to diversify, for example by exploring new retail concepts and seeking to attract a broader mix of retail tenants including more food and beverages outlets and lifestyle stores.
The information contained in this report is a summarised version of our observations on the market in the past quarter. A more in-depth overview on specific sectors are available upon request.
FOR MORE INFORMATION Nigel Smith Managing Director | Hong Kong +852 2822 0508 nigel.smith@colliers.com Individual Licence No: E-111570
Sebastian Skiff Executive Director | Retail Development & Asset Management | Asia +852 2822 0676 sebastian.skiff@colliers.com
Copyright Š 2016 2015 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.
2
Joanne Lee Associate Director | Research & Advisory +852 2822 0557 joanne.lee@colliers.com
Colliers International | Hong Kong Suite 5707 Central Plaza, 18 Harbour Road Wanchai, Hong Kong +852 2828 9888 colliers.com/hongkong Company Licence No: C-006052
North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International