Hong Kong is a sophisticated, dynamic and high growth retail market, with a well-established network of shopping centres and retail districts. By Asian standards it is quite transparent, however, per capita provision of retail floorspace in Hong Kong is low by international standards, and growth continues to outstrip supply
The rise of the Chinese consumer
In recent years, retail sales have grown strongly (12.1% per annum) thanks to big increases in the number of Chinese tourists coming to Hong Kong, where branded goods are known to be authentic and cheaper. Branded goods on the Chinese mainland are not fully trusted by consumers and are subject to a luxury sales tax. These two factors are working in favour of Hong Kong, encouraging increased travel to buy luxury goods more cheaply at the Hong Kong stores. Without the influx of Chinese tourists, we estimate that Hong Kong retail spending growth would have been half of what it was.
Few development opportunities pushing rents up
So, why isn’t there more retail development in Hong Kong?
The main answer is that there is a lack of development opportunities in many parts of the densely populated and highly developed city, with a relatively strict planning regime. Developments do occur, but they are generally small centres, with little space for large scale tenants. Finding large scale sites in popular, more established areas is close to impossible.
The lack of new supply in popular locations has allowed rents to grow rapidly. According to CBRE, prime retail rents in Hong Kong (particularly around Causeway Bay) are now the highest in the world, exceeding those in New York.
What’s on the horizon for Hong Kong
The importance of the Chinese tourist should not be underestimated, particularly for luxury retailers. But reliance on them is a double edged sword. The Chinese Government could easily turn off the tourist tap by limiting travel permits for political reasons; or lowering taxes charged on luxury goods in China itself. Furthermore, Chinese shoppers will gradually become much more comfortable with the locally sold luxury goods and the latest Australian visitor data confirms that they are increasingly looking further afield for their holidays.
Retailers and shopping centre owners are very aware of this – a number of good operators are already refocussing their efforts towards the local market. They want to benefit from the tourists but they also need to stay relevant to locals to mitigate the risk of a fall in Chinese tourist spending. Switching between a tourist focussed centre and a locally focussed centre is not always that easy – local focussed centres generally need more mass market brands that are becoming increasingly available in China, and less of the luxury product that Chinese mainlanders crave. It becomes a question of balancing short term gain with longer term stability.
Still, the lack of shopping centre supply in Hong Kong could ultimately be beneficial. When the growth in Chinese tourists does start to slow, having a constrained supply of shopping centre floorspace should limit any fallout. It will be much easier for the market to adjust to the change than if developers had been able to act on the ‘irrational exuberance’ that tends to plague unencumbered property markets in boom times.
Hong Kong remains an exciting market in which to operate, and one with many opportunities. Understanding the nuances of Hong Kong’s relationship with China is half the fun…
This article first appeared in the Urbis Think Tank.
Urbis is an interdisciplinary consulting firm offering services in planning, design, property, social planning, economics and research. Working with clients on integrated or standalone assignments, Urbis provides the social research, analysis and advice upon which major social, commercial and environmental decisions are made. With over 300 staff Urbis is uniquely positioned to handle projects from the simplest to the most complex.
