Bleak Outlook for Hong Kong's Retailers

Hong Kong's retail landscape is changing and this is bad news for many landlords in the city. Retail tax cuts in mainland China, declining tourist inflows and falling retail sales growth will drive a 15-20% y-o-y cut in high street rents in Hong Kong during 2015, according to recent forecasts by Jones Lang LaSalle.

Tourism, Retail Sectors Show Signs of Weakness

The tourism market is cooling, which is bad news for what has been the bedrock of Hong Kong's retail sector. Between January and May 2015, Hong Kong visitor arrivals grew 3.9% y-o-y, much slower than the 12% growth recorded in 2014. Visitors from Mainland China grew by just 5.9% year-on-year, compared with a 16% growth in 2014.

As such, sales growth is slipping. Total retail sales growth declined 1.8% year-on-year in the first five months of 2015, against average growth of 11% per year over the past 10 years. Spending on jewellery and watches has been hit markedly by China's anti-corruption campaign and the strength of Hong Kong dollar against other global currencies, such as the Yen, has also made other global shopping destinations more enticing.

15-20% YoY Rent Drop Expected

Looking into 2015, high street rents are expected to drop 15-20% y-o-y, after running up significant growth in previous years. Shopping centres, in contrast, will see steady demand, since retailers and customers prefer the tailored shopping environments.

This amounts to a significant change in Hong Kong and a challenge to landlords in the city. After long being used to steady annual rent growth, landlords will have to adjust to a slightly bleaker future, particularly with regards to prospects for earnings growth. That said, Hong Kong's retail rents will remain some of the highest in the world, meaning that high street assets will still be a significant cash generator for years to come.

A Changing China Presents Challenges to Hong Kong's Leaders

The above trends also speak to changing patterns in tourism from mainland China. Easier visa processes, the strength of the RMB and growing transport links are making other Asian destinations more attractive for Chinese tourists. Japan is a case in point: following the devaluation of the Yen in 2013, it welcomed 405,800 Chinese tourists in 2014, up 113% y-o-y.

Following tax cuts in June, Chinese consumers also see less benefit from flocking to Hong Kong. The Chinese government cut import taxes on beauty products and a whole range of consumer goods, thus removing Hong Kong retailer's price advantage, which was based on the high taxes previously charged on the mainland.

All this adds up to an uncertain future for both Hong Kong's retail sector and the wider economy. It will still remain a retail hotspot but expectations that it will see similar growth to previous years look wide of the mark. How the Hong Kong government will react to a changing China remains to be seen but, with 9% of its population employed in retail the sector, it needs a strategy, and soon.