Mid-market retailers poised for high growth in Hong Kong

17 Sep '15

4 min read

Mid-market retail brands are set to take over luxury brands as the main driver of retail demand in Hong Kong according to global real estate advisor, CBRE in its latest Special Report, The Changing Retail Landscape: How to Survive the Slowdown in Hong Kong?

According to the report, the Hong Kong retail sector outperformed over the last decade with strong sales growth for high-end products, generating an increase of 213 per cent in average rents from 2003 to 2014 for core street shops in Causeway Bay, Tsim Sha Tsui, Mong Kok and Central.

However, luxury retailers have experienced a slowdown since 2014 hindered by a range of factors including the change of spending and travelling patterns of mainland Chinese tourists.

Luxury retailers are adjusting their leasing strategies to save costs, and more mid-range brands are looking to tap into prime locations at relatively affordable rental levels.

CBRE anticipates three trends in the next five years. The first is that the main driver of demand for retail space is shifting from high-end consumer goods to mid-market brands Second, local demand will gradually regain a bigger share in total retail sales compared with tourist spending, and third, decentralized areas will provide a significant proportion of new retail space, offering more leasing options.

The tailwind for luxury retailers has slowed since 2014 hindered by a range of factors including Chinese government's anti-corruption measures, milder GDP growth in China, weakening Asian currencies and the loosening of policies on travel for mainland Chinese. These are all unfavorable factors for Hong Kong's tourism and retail sales. The total retail sales in Hong Kong from January to July 2015 edged down by 1.8 per cent year-on-year. Despite the gloomy outlook for the retail sector, opportunities are emerging for mid-market retailers.

“The retail sector is experiencing a structural change,” said Joe Lin, Executive Director, Retail Services, CBRE Hong Kong. “Over the past decade, high-street shop landlords have reaped the benefits of strong demand from luxury retailers and massive rental growth. Landlords must now be more realistic on rental negotiations, as luxury retailers are adjusting their leasing strategies to save costs, and more mid-range brands are looking to tap into prime locations at relatively affordable rental levels. This opens the door for mid-market brands to expand. In the last quarter, we saw prime street shops leased to mid-market brands following the lease expiry of the previous luxury goods retailers.”

To cope with the slowdown, luxury retailers are consolidating their second-tier shops, which will increase space availability in the market. Some high-end fashion, cosmetics and watch and jewelry retailers have either stopped renewing leases or surrendered spaces well ahead of expiry.