Hong Kong’s once-vibrant retail sector faces perilous times

Hong Kong might still stand among the most attractive and expensive shopping hubs in the world – a surprising tribute to the city’s retail resilience in spite of the dark tunnel the economy has crawled through during the past four years. The question of how long this will remain so has come into sharp focus with two striking developments during the past week.

First, there was a “Main Streets across the World 2023” report from international property consultants Cushman & Wakefield. The report paints in fine detail the trends in luxury retail shopping in hundreds of high streets across the world.

Worldwide, Cushman reports that most prime central business districts remain vibrant, with the top 250 retailers reporting an average 8.5 per cent growth in business in 2022.

But the story for Hong Kong is perilously mixed: Tsim Sha Tsui and Causeway Bay retail rental costs remain the highest in Asia. There are questions over whether such stratospheric rental levels reflect vibrancy or can be sustained.

Tsim Sha Tsui rentals have slipped from second- to third-highest worldwide, with New York’s Fifth Avenue still the most costly in the world and Milan’s Via Montenapoleone overtaking Tsim Sha Tsui to capture second place.

While Hong Kong still demands the highest retail rentals in Asia by a large margin – 50 per cent higher than Ginza or Omotesando in Tokyo and three times the rentals along Shanghai’s West Nanjing Road – the reality is that rents have fallen by almost 40 per cent since 2019.

That has undoubtedly brought some relief to Hong Kong’s retailers, many of which were zombies through much of the Covid-19 pandemic. However, it leaves open questions about whether rentals have fallen far enough to restore viability through what is proving to be a long and tentative economic recovery.

Shoppers mingle outside retail businesses in Tsim Sha Tsui on March 2. Photo: May Tse

That brings us to last week’s second nasty surprise: news that the London-based luxury retailer Harvey Nichols plans to close its 60,000-sq-ft, five-floor flagship store in the Landmark in Central. Landlord Hong Kong Land is putting on a brave face, but filling such a large space in the current retail market circumstances at present rental levels will be a tall order.

There would be less to be concerned about if Harvey Nichols’ retrenchment was an isolated incident, but it is not. Japan-headquartered Sogo shut its Tsim Sha Tsui store in March, where Canton Road vacancy rates have been estimated by real estate consultants Savills to stand at 53 per cent. Meanwhile, Reuters reports that Tiffany, Valentino and Burberry, to name but three, have retrenched.

Retailers’ prospects would be brighter if spending was set to recover strongly and quickly from the pandemic, but that seems unlikely in spite of the government’s injections of around HK$136 billion (US$17.5 billion) of consumption vouchers since 2020. The Census and Statistics Department says retail sales for the first nine months of this year are 18.6 per cent up on the same period in 2022, which is encouraging but still leaves sales far below 2018 levels, when the figure was HK$485 billion.

Unfortunately, there is a long list of reasons retail sales will be slow to recover. Slow economic growth, the possibility of a mild recession in 2024, high interest and mortgage costs, and inflationary pressures on household finances are keeping non-essential spending in check.

The slow revival of mainland tourism and visitors’ reduced levels of spending – coupled with a surge in Hongkongers opting to travel north of the border to shop in the Greater Bay Area – has depressed retail spending inside Hong Kong. The surge in online shopping, which currently still accounts for only 7.1 per cent of consumer spending compared with about 30 per cent on the mainland, is sure to continue growing strongly, almost certainly at the expense of high-street stores.

If all these factors did not generate enough pressure, the popularity of remote working is squeezing the need for physical space in central business districts. So, too, is the reality that those hunting for global quality brands at bargain prices today have more choices where to shop – not only on the mainland but in cities such as Ho Chi Minh, Seoul and Singapore.

Balancing all these factors, property consultancy JLL predicts that “Hong Kong’s retail rents are unlikely to return to their historical market peaks in the coming five years”.

A group of mainland tourists gathers under a tree in Wong Tai Sin on October 15. Photo: Xiaomei Chen

My sense is that even this forecast might be optimistic. Before the pandemic, who would have forecast the surge in shop theft, which according to the US National Retail Federation jumped 20 per cent last year? Not only has this directly weighed on retailer profits, but it has led to an extra 28 per cent outlay on enhanced security.

So whatever Cushman says about the continuing vibrancy of central business and retail districts around the world, I suspect the state of consumer retail is more perilous than most are willing to acknowledge. Cushman themselves point to a “K-shaped” recovery, with luxury retail and value retail continuing to grow but discretionary retail shops under persistent downward pressure.

If Hong Kong is going to continue to thrive, this must mean a significant restructuring of the economy with less reliance on tourists and their retail spending interests. After four marvellous decades, our property moguls could face protracted turbulence ahead.

David Dodwell is CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific over the past four decades