Featured article from Joy Wong, Retail, JLL Hong Kong.

After enjoying several years of retailing wonderland, Hong Kong’s retail sector has now taken a turn for the worse. A slowing economy and the launch of the anti-corruption campaign on the Mainland along with the government’s push to squeeze out parallel traders by capping visits from Mainland Chinese to once a week, have all taken a toll on retail sales and market sentiment.

Disappointing sales figures, in turn, have halted the expansion plans of some luxury retailers – typically those who can afford to pay the higher rents in the market – leading rents to fall; High Street shop rents are already down by 7.3% since peaking in 3Q14.

With visitor arrivals from the Mainland growing at the slowest rate since the Global Financial Crisis and retail sales (excluding motor vehicles) deteriorating further, down 4.4% y-o-y in 2Q15, the question now being asked by our clients is how deep of a correction can we expect?

Although headline data for the inbound tourism market and retail sales look less than promising, it’s not all gloom and doom for the retail market. Yes, some retailers are finding current market conditions challenging but others continue to post steady growth and remain active in carrying out expansion plans.

Watson’s, for example, recently leased a 12,000 sq ft shop on Yun Ping Road in Causeway Bay for around HKD 2.5 million per month. The local pharmacy had been on the lookout for a new shop since surrendering its 51,000 sq ft shop at Jardine’s Bazaar in Causeway Bay in 2010 after being outbid by Forever 21, which leased the premises for around HKD 11 million per month.

This, at least, is a bright spot in the market as it shows that there is a floor for rents. Based on transactions being completed in the market so far, it would appear that a 30% reduction in rents is more than sufficient to pique the interest of retailers. A number of local retailers and fast fashion and lifestyle store operators are already taking advantage of the more affordable rents in prime shopping locations to open new stores.

Hence, while rents in the overall market are likely to sustain further falls in the near term, there is a bottom. Recent transactions also suggest that there is still plenty of demand for retailing space in the city. Although a correction in rents is likely to be painful for some landlords, it will help lead to a more balanced retailing landscape – that is not skewed towards just luxury brands – and a stronger base for future rental growth.