Growing at a Slower Pace

Transcription

1 2Q 2012 market overview research & forecast report hong kong retail market colliers international HONG KONG Growing at a Slower Pace Hong Kong s inbound tourism growth remained resilient, rising 14% YoY to 11.2 million during the three-month period ending May However, growing concerns over the global economic outlook have dampened consumer sentiment, causing the retail market to witness its slowest growth since September 2009, excluding seasonal distortions in January and February each year caused by the timing of Lunar New Year. Looking forward, negative shocks from the global economic slowdown and sustained inflation will continue to pose challenges for Hong Kong retailers. Hence, retail sales growth is expected to slow down to 8 to 10% for the whole of 2012, compared to a 16.4% increase in market indicators ForEcast overall performance New supply Tenant Demand Incentives rents capital values yields Although retail sales growth tapered off during 2Q 2012, competition for retail spots in prime shopping locations was fierce as demand far outstripped supply. The extreme supply-and-demand imbalance in the prime retail locations remained the key driver for retail rental growth. The average retail rents for ground-level shops in the four traditional shopping districts continued its upward trend, albeit at a slower pace considering the fragile economic outlook, rising 3.4% QoQ in 2Q In view of the supply-demand imbalance in the retail market, landlords were aggressive in rental negotiation. Given that it s still a landlord s market in 2Q 2012, some tenants have to face a double increase in rents upon a lease renewal. Likewise, rents in second-tier streets also experience strong growth in rents. Due to the limited supply of retail space in the first-tier streets, some overseas brands chose to open flagship shops in second-tier locations, where shopper s traffic has been driven by the positive spill-over effect. The first-tier streets in Hong Kong s prime shopping locations are occupied by overseas luxury and fashion brands where most affluent Chinese visitors are already familiar with. International retailers are also seeking retail space in the second-tier streets where shopper traffic is increasing due to the positive spill-over effect from the first-tier streets. Hence, individual local retailers have to relocate their shops to second- or third-tier streets due to limited stock available for lease and exorbitant retail rents. In view of ambitious expansion of international retail brands, the sustained growth of the Hong Kong retail market will be constrained by the severe lack of sizable prime retail space to cater to the ever-rising number of international brands. To recall, Hong Kong s retail market performed solidly in the first half of 2012 despite the increasingly challenging external environment. However, weakening consumer sentiment among affluent shoppers has begun to impact retailer s revenues. Given that retail rents are highly and positively correlated to retail sales performance, the slower retail sales growth could hinder landlords ability to raise rents in the near term. Nevertheless, considering the rising inflation, sustained growth in the number of visitors to Hong Kong along with Hong Kong s resilient domestic consumption, retail rental growth is expected to continue its upward trend at a slower rate of 12% over the next 12 months.

2 Growing at a Slower Pace DEMAND REMAINED STRONG With growing concerns over the global economic outlook which dampened consumer sentiment, retail sales growth slowed noticeably in 2Q However, supported by the continual inflow of international brands, robust tourist spending and sustained domestic consumption, leasing demand remained strong during the quarter. INBOUND TOURISM According to the Hong Kong Tourism Board (HKTB), Hong Kong recorded a total of 11.2 million visitor arrivals during the three-month period ending May 2012, an increase of 14% YoY. Meanwhile, the number of visitors from mainland China increased dramatically, rising 22% YoY to 7.7 million from March to May VISITOR ARRIVALS Number of Arrivals (Million) % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Arrivals from China (% of Total) Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Total Arrivals Arrivals from China (% of total) Source: Hong Kong Tourism Board HONG KONG RETAIL SALES 50,000 50% 40,000 40% 30,000 30% Retail Sales (HK$ Million) 20,000 10, % 10% 0% Growth (% YoY) -10,000 Jan-98 Jun-98 Nov-98 Apr-99 Sep-99 Feb-00 Jul-00 Dec-00 May-01 Oct-01 Mar-02 Aug-02 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12-10% -20,000-20% -30,000-30% Retail Sales Vaue (HK$ mn.) % YoY Source: Census & Statistics Department, HKSAR Government p. 2 Colliers International

3 GLOOMY GLOBAL OUTLOOK SLOWS RETAIL SALES The growth of retail sales maintained its upward trend during 2Q 2012 but the pace slowed noticeably as the gloomy global economic outlook dampened consumer sentiment in spite of buoyant visitor arrivals. In May 2012, the total value of retail sales slowed to single digit growth (8.8% YoY), which was the slowest pace since September 2009, excluding seasonal distortions in January and February each year caused by the timing of the Lunar New Year. Looking ahead, negative shocks from the global economic slowdown and sustained inflation pose challenges for Hong Kong retailers. In view of the these challenges, retail sales growth is expected to slow to 8% - 10% for the full year of CAUTION WEIGHTED ON HIGH-END PRODUCTS Among different categories of retail sales in Hong Kong, the value of the sales of jewellery, watches and clocks, and valuable gifts was still comprising 22% of the total retail sales as of May 2012, given that high-end luxury products remained the most favoured item of mainland tourists due to quality assurance, tax differences and currency appreciation. However, the total value of sales of jewellery, watches and clocks, and valuable gifts gained only 3.1% YoY in May 2012 the slowest growth rate since September 2009, as the contracting China economy dampened mainland visitors buying sentiment. Analysed by volume, sales of jewellery, watches and clocks, and valuable gifts recorded a year-on-year fall for the first time since June 2009, dropping 2.9% YoY as of May VALUE OF RETAIL SALES Sales of Jewellery, Watches and Clocks, & Valuable Gifts 12, % 10, % Value of Total Retail Sales (HK$ Million) 8,000 6,000 4,000 2, ,000 Aug-01 Dec-01 Apr-02 Aug-02 Dec-02 Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 80% 60% 40% 20% 0% -20% Proportion to Total Retail Sales Volume (%) -4,000-40% -6,000 Value of Jewellery, Watches and Clocks & Valuable Gifts YoY -60% Source: Census & Statistics Department, HKSAR Government AMBITIOUS EXPANSION SHOWED NO SIGNS OF ABatinG Competition for retail spots in prime shopping areas was fierce as the demand far exceeded supply. For example, Puyi Optical paid HK$2 million per month for a 1,200 sq ft ground-level shop at 54A - 66 Canton Road, Tsim Sha Tsui. The deal translated to an average price of HK$1,667 per sq ft per month. The 1,200 sq ft shop was previous occupied by Coloumix, a cosmetic retail chain, paying a monthly rent of HK$900,000. Although local jewellery shops saw a slowdown in business revenue growth, individual local jewellery shops were still aggressively taking up space in prime retail locations to maximise their exposure to inbound tourists. For instance, Chow Tai Fook Jewellery committed to lease 1,400 sq ft of retail premises in Tsim Sha Tsui that were previously occupied by 7-Eleven, Italy Station and VIP Watch & Jewellery for HK$2.6 million per month. However, considering that mainland Chinese visitors have tightened their belts amid slowing economic growth in China, the expansion pace of jewellery and watch shops is expected to slow down in the coming quarters. Colliers International p. 3

4 Prominent Retail Leasing Transactions in 2Q 2012 Premises district floor rental (HK$ / month) GFA (sq ft) Unit Rental (HK$ / sq ft / month) Tenant 54A-66 Canton Road Tsim Sha Tsui G/F 2,000,000 1,200 1,667 Puyi Optical Haiphong Road Tsim Sha Tsui G/F 2,600,000 1,400 1,857 Chow Tai Fook Jewelley 8 Hysan Avenue Causeway Bay G/F, 1/F 1,800,000 15, Hackett 6-8 Kai Chiu Road & 4-8 Kai Chiu Road Causeway Bay G/F, 1/F 5,000,000 6, Bonjour Russell Street Causeway Bay G/F 1,520, ,900 Swatch Note: Information from market sources Source: Colliers BOTTLENECK FOR RETAIL SPACE The first-tier streets in Hong Kong s prime shopping locations are occupied by overseas luxury and fashion brands where most affluent Chinese visitors are already familiar with. International retailers are also seeking retail space in the second-tier streets where shopper traffic is increasing due to the positive spill-over effect from the first-tier streets. Hence, individual local retailers have to relocate their shops to second- or third-tier streets due to limited stock available for lease and exorbitant retail rents. In view of ambitious expansion of retail brands, the sustained growth of the Hong Kong retail market will be constrained by the severe lack of sizable prime retail space to cater to the ever-rising number of international brands. Rental Trend GROWING AT A SLOWER PACE The unresolved European debt crisis and the slowing economic growth in China has weighed on buying sentiment. In line with the slowing retail sales growth, retail rents in the four core shopping districts of Central, Causeway Bay, Tsim Sha Tsui and Mongkok continued to rise albeit at a slower pace, rising 3.4% QoQ in 2Q Meanwhile, average retail rents in Central outpaced other districts, increasing 4.1% QoQ during the quarter supported by limited retail space and the opening of overseas flagship stores. In view of the supply-demand imbalance in the retail market, landlords were aggressive in rent negotiations. Given that it was still a landlords market in 2Q 2012, some tenants have to face a double increase in rents upon lease renewal. Likewise, rents in second-tier streets also experienced strong growth in rents. Due to the limited supply of retail space in the first-tier streets, some overseas brands chose to open their flagships in second-tier locations, where shopper traffic has been driven by the positive spill-over effect. Retail Rental Index by Major Districts (*) District 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12 QoQ change Causeway Bay % Central % Mong Kok % Tsim Sha Tsui % Overall % (Nov-2011 = 100) * Street level shops on key street segments Source: Colliers p. 4 Colliers International

5 Jan-01 hong kong 2q 2012 retail Investment Market Activity RETAIL SALES TRANSACTION ABOVE HK$10 MILLION 25,000 20,000 Total Value (HK$ million) 15,000 10,000 5,000 Long Term Average: 1,920m 0 Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Source: Colliers RISING RENTS ATTRACTED INVESTORS Investment sentiment in the retail sector was upbeat in 2Q 2012, with the overall number and total consideration of investment sales of retail units with a lump sum consideration of HK$10 million or above expanded by 260% and 87%, respectively. Given the limited buying options in the prime shopping locations, investors sought investment opportunities in non-core districts. Both local investors and end-users continued to keep an eye on retail properties for medium- to long-term growth potential. RETAIL PROPERTIES IN DECENTRALISED DISTRICTS In May 2012, the sale of Emperor Plaza in Tsuen Wan captured market attention. Located at Nos. 55, 55A - E Chung On Street, the 23-storey Ginza-type commercial building covers a site area of approximately 13,024 sq ft. Emperor International sold the whole block of Emperor Plaza to a local consortium for HK$1.45 billion. Based on a total gross floor area of 195,600 sq ft, the average price was about HK$7,413 per sq ft. According to Emperor International, the total rental revenue generated from the commercial building for the year ending 31st March 2012 was about HK$51 million. The estimated initial yield is 3.5% per annum. Meanwhile, a prominent strata-title sales transaction in a prime shopping district was the sale of a batch of retail premises in Causeway Bay, from Yu Ming Group to a cash-rich Chinese investor for HK$1.15 billion. The retail premises included Shop A & B on G/F, 1/F and 2/F, Shop S on 12/F and flat roof at Percival Street. With a total gross floor area of 23,932 sq ft, the average price is about HK$48,053 per sq ft. Colliers International p. 5

6 YIELD EDGED DOWN The further compressed retail investment yield suggested that retail prices are growing at a faster rate than retail rents. The overall retail investment yield edged down 10 basis points from 2.9% in February 2012 to 2.8% in May 2012 illustrated by the latest figures from the Rating and Valuation Department. Meanwhile, the average yield of prime retail premises in traditional shopping locations remained low at about 2.7%. In anticipation of a slowdown in retail sales growth and the subsequent retail rental growth, retail yield in the four traditional shopping districts is expected to edge up in the near term. RETAIL YIELD 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Source: Rating and Valuation Department p. 6 Colliers International

7 Market Outlook Hong Kong s retail market demonstrated solid performance in the first half of 2012 despite the increasingly challenging external environment. However, weakening consumer sentiment among affluent shoppers has begun to impact retailers revenues. Given that retail rents are highly and positively correlated to retail sales performance, the slower retail sales growth could hinder landlords ability to raise retail rents in the near term. However, even as the pace of retail sales growth slows, consumer sentiment remains positive, as Hong Kong s retail market is still benefitting from the tax-free policy, quality assurance and currency differences. Supported by rising inflation, robust inbound tourism growth, increasing household income and limited supply of retail space in the prime shopping locations, overall retail rents in the traditional shopping districts will continue their upward trend but at a slower rate of 12% over the next 12 months. While retail rents in the first-tier streets will be underpinned by the strong demand for prime spots due to the aggressive expansion of overseas brands, the rise of retail rents in second-tier streets is expected to slow at a faster rate in the face of downside risks to the retail rental market. HONG KONG RETAIL RENTAL INDEX 140 Forecast Nov-02 Mar-03 Jul-03 Nov-03 Mar-04 Jul-04 Nov-04 Mar-05 Jul-05 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Index (Nov 2011 = 100) Mar-13 Source: Colliers Colliers International p. 7

8 522 offices in 62 countries on 6 continents United States: 147 Canada: 37 Latin America: 19 Asia Pacific: 201 EMEA: 118 $1.8 billion in annual revenue in ,250 million square feet under management Over 12,300 professionals Colliers International (Hong Kong) Limited Suite 5701 Central Plaza 18 Harbour Road Wanchai Hong Kong tel FAX Company Licence No: C Richard Kirke Managing Director Hong Kong tel FAX richard.kirke@colliers.com Individual Licence: E Simon Lo Executive Director Research & Advisory Asia tel FAX simon.lo@colliers.com Copyright 2012 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. You are receiving this collateral because you either subscribed for it or expressed your interest to receive it at some point to Colliers International. If you do not wish to receive future communications from us, please contact Colliers International by at unsubscribe.hongkong@colliers.com with your name and item to unsubscribe Accelerating success.