Hong Kong retail pain to persist amid local spending ‘leakage’ while visitors splurge less
- Retail sales will remain under pressure this year after declining 6 per cent year on year in the first five months, S&P Global Ratings says
More pain is in store for Hong Kong’s retail market amid “structural changes” that have led to residents spending more overseas and online while the city attracts fewer mainland Chinese visitors who are splurging less than in previous years, according to S&P Global Ratings.
“We anticipate that Hong Kong’s retail sales will be under pressure this year, after declining 6 per cent year on year for the first five months,” the credit-rating agency said in a report titled “Hong Kong Property: Survival of the Fittest” on Monday.
“The weakness will span both ordinary and luxury spending. Even supermarket sales are a bit cautious. In our view, the malaise won’t be lifted overnight.”
Meanwhile, online shopping is eating away at retailers’ revenues, as its share of total retail sales rose to 8.7 per cent in May, higher than the average of 8.1 per cent in 2020 to 2022.
At the same time, tourist arrivals have not fully recovered, and spending by same-day visitors from mainland China remains lower than in 2018, S&P said.
Hong Kong is targeting 46 million visitors this year, an increase of 35 per cent from 2023, according to a government forecast. However, that would still be only 70 per cent of the record 65 million tourists who came in 2018. Meanwhile, estimated spending per overnight visitor is expected to shrink by as much as 16.4 per cent to HK$5,800 (US$742) this year, from HK$6,939 in 2023.
Tourist spending typically accounts for 30 per cent of overall retail sales in the city, and mainland China tourists make up 80 per cent of all tourist contributions, according to real estate broker CBRE.
The city’s slumping property market, with home prices down by a quarter since their peak in 2021, is further hurting consumption, S&P said. Residential prices are forecast to decline by as much as 10 per cent this year, which is likely to continue to weigh on consumer confidence, the report said.
The downtrend will weigh on rents.
“Hong Kong retail landlords will be signing new leases at up to 5 per cent lower than current ones, by our estimates,” the report said. “Their credit profiles can withstand this, as well as our downside scenario of 10 per cent negative retail rental reversions.”
Shopping centres that are revamping their offerings to adapt to the shift are likely to fare better than high-street and individual strata-title retail properties, S&P said.
“Landlords who are proactively adapting to the changing market through asset enhancements and tenant reshuffling are likely to outperform in terms of occupancy and rent levels,” said Wilson Ling, associate director at S&P.
Some major retail landlords have apparently got the memo about adapting.
The developer’s single biggest investment in the city in a decade intends to create an “extraordinary experience” for wealthy shoppers and strengthen the presence of global luxury brands in Hong Kong.
Sun Hung Kai Properties has shifted its tenant mix by introducing mainland Chinese brands to domestic shoppers and international brands for visitors from across the border, S&P said. It also created a pet-friendly area in its Yoho Mall in Yuen Long, while New Town Plaza in Sha Tin recently reconfigured the mall’s rooftop as a dinosaur-themed playground. These efforts seem to be working, as the developer has kept mall occupancy at 95 per cent.
Vacancy rates in the first quarter were between 1.3 per cent and 5 per cent in shopping malls and between 6.8 per cent and 12.8 per cent in high-street shops, S&P said.
High-street rents have fallen by about 30 per cent from a peak in 2019, according to CBRE. Still, the consultancy believes that with holidays in the second half of the year, such as the National Day week in October and Christmas in December, “retail sentiment will improve”, said Lawrence Wan, senior director of retail at CBRE Hong Kong.
