Hong Kong retail landlords still offering deeper cuts in shop rents

A retail spot was recently granted to a tenant for 51.3% lower than the previous lease.

As tourists remain absent in Hong Kong, the retail market is still facing uncertainties. According to a Knight Frank report, total retail sales value fell 1.2% YoY to HK$27.7 billion in June, which was more subdued than market expectations, as some consumers preferred to wait for the second round of the voucher scheme distribution. 

In the first half of 2022, total retail sales value fell by 2.6% YoY, registering over a 30% decline compared to the same period in 2018 (pre-pandemic), reflecting a continuing significant performance gap between the current and the pre-pandemic retail market.

Here’s more from Knight Frank:

According to market sources, Shop 1 (c. 1,500-sq-ft) on the ground floor was leased to CHARLES & KEITH for a monthly rent of HK$400,000. Formerly this shop, along with space on the first floor (c. 4,000-sq-ft) was leased to MaxMara, a high-end Italian fashion brand, that paid HK$1,500,000 per month. 

The weakening sentiment in Hong Kong’s retail market has prompted landlords to subdivide sizeable premises and offer deeper cuts in shop rents. Similarly, the Peak Lookout restaurant, a popular dining spot for tourists, saw its rent cut in half as tourists disappeared. 

According to the Government Property Agency, the space was granted to Modern China International for HK$112,000 in July 2022 or 20% of gross income, whichever is greater, which is 51.3% lower than the previous lease, indicating that the outlook for tourism in Hong Kong remains highly uncertain. 

We expect downward pressure on retail rents to remain for a while, as the poor economic outlook, more aggressive interest rate hike cycle and volatile stock market are expected to dampen local consumption sentiment and exert considerable pressure on the retail market down the road. However, the number of leasing transactions should increase in the coming months as the shorter of “3+4” quarantine arrangement could be a positive news to lift inbound tourism.