Retail: Luxury comes back into fashion in Hong Kong

After a torrid four years, Hong Kong’s luxury retail market is bottoming out and attracting value-add investors.

Hong Kong’s retail property market is like no other – the city has more Tiffany stores than the whole of the UK – but in recent years the sector has underperformed. Savills data show that average prime high street shop rents halved between the peak in late 2013 and late last year. This year, retail sales growth has been strong – 29.8 percent growth in February, the strongest month for eight years.

Nick Bradstreet, head of retail leasing at Savills Hong Kong, says: “Luxury retailers I have spoken to recently say business has improved significantly this year, after some very tough times. The weakness of the US dollar has made Hong Kong shopping cheaper for mainland Chinese visitors. Rents for luxury shops are starting to rise after some good months for retail sales and those for shopping malls are following, although things are still tight for mid-market centers. Overall, retailers are still fairly cautious and we don’t expect rapid increases in demand for space.”

Welcome return

Relations between Hong Kong and the mainland are also warmer. The number of visitors from China is expected to hit 60 million this year after three years of falling. These visitors, particularly the most wealthy, are crucial to Hong Kong’s retail market and the reason it can sustain a large number of high-end stores.

Market players also say Beijing seems to be taking a more relaxed view on the practice of business gifting, which dried up as part of President Xi Jinping’s crackdown on corruption. Hong Kong’s watch and jewelery shops in particular suffered badly during the clampdown.

Eyeing up the island-city

The prospect of recovery has attracted a number of private equity buyers to the sector. Chelsfield Asia has been busy in recent months, buying both luxury and neighborhood retail for its Asia value-add fund. The UK-headquartered developer and asset manager bought the former Hermes store – the ground floor of The Galleria, 9 Queen’s Road Central – from Hermes for $86 million. The purchase price represents a steep discount to the $180 million Hermes was asking when it first put the store on the market in 2016, reflecting the tribulations of the luxury retail segment in recent years.

“The Hong Kong and the Chinese economies look positive and business sentiment is improving”

Nick Loup

Chelsfield Asia chief executive Nick Loup says: “We felt the luxury retail market was bottoming out so it was a good time to buy exposure to a prime Central retail position. Both the Hong Kong and the Chinese economies look positive and business sentiment is improving.” The unit will be divided into two or three in order to achieve a higher rent per square foot and Chelsfield has already secured a tenant for half the space, a luxury brand new to Hong Kong, says Loup.

Remain cautious

There are factors that could slow the luxury retail recovery, says Bradstreet. “There are complications: the dollar has recently strengthened and China recently cut import tariffs, which will lower the cost of luxury goods on the Mainland.”

Pascal Martin, partner at OC&C Strategy Consultants, says: “However, given the relatively small scale of the drop relative to the goods retail price (a 7 percent average drop in duty on imported wholesale price may only enable a 2-3 percent drop in China retail price), Hong Kong retailers may not find it that difficult to reduce operating costs to maintain their comparative price attractiveness.”