Hong Kong Prime Retail MarketView Q2 2013 CBRE Global Research and Consulting RENTS RETAIL SALES (VOLUME) VISITOR ARRIVALS CONSUMER CONFIDENCE +3.8% year-to-date +12.2% y-o-y +13.8% y-o-y Q1 2013 +23 index pts RETAIL RENTAL GROWTH CONTINUES TO DECELERATE Hot Topics Recent sales growth driven by a 2013. The stronger performing drop in gold prices categories of department stores (+24.5% y-o-y); Chinese drugs & herbs . Retail sales numbers were Retail sales figures received a (+17.2% y-o-y); and medicines & propelled by a fall in gold prices. significant boost from the large drop in cosmetics (+16.3% y-o-y) helped offset The sharp reduction in gold gold prices in Q2. In fact, gold spot the lackluster performance from prices, nearly 23% lower than in prices plummeted 9% in one day in electrical goods and photographic April and have continued on a Q1, fueled gold-related sales, equipment (-2.5% y-o-y) and consumer downward trajectory, ending nearly benefitting jewellery and watch durable goods (-4.6% y-o-y). While retailers. While the initial surge 23% lower than the start of the quarter. certain retail segments are in gold products is likely to be The reduced gold prices have resulted experiencing decelerating growth, the temporary, the lower gold prices in a surge in demand for gold-related sluggishness of these sectors may have should help sustain the jewellery, goods, causing jewellery, watches and been caused by a shift in demand to watches and clocks & valuable clocks & valuable gifts to record a 69% gold products. Overall, despite robust gifts sales in the future. and 36% year-on-year increase in sales retail sales, non-luxury retail sales in April and May respectively. growth has started to ease, leading to Jewellery sales should remain elevated softer rental growth. PRC tourist arrivals, growing by as long as gold prices stay lower than over 20% year-on-year in May, historical norms. However, this Tourist arrivals boosting remained healthy with over 3 demand is likely to wane in the coming demand for shopping centres million Mainland Chinese months as the initial rush in sales, from A healthy tourist influx has increased arriving to visit Hong Kong. The tourists who hope to quickly cash in on demand for mid-range fashion brands, new Kai Tak cruise terminal has the reduced priced gold jewellery, is helping to support shopping centres. also opened in June, helping to challenging to sustain. deliver additional tourists by sea. Tourist arrivals increased 13.8% year- Factoring out the gold-related on-year in May to 4.14 million visitors demand, retail sales growth has started while Mainland Chinese tourists . Leasing demand was restrained to slow, recording a 7.1% year-on-year continued to outpace others, growing due to slower retail sales growth gain in April/May 2013 compared to 20.9% year-on-year in May. in the non-luxury sector and high 12.9% year-on-year increase for Q1 rentals. The softer economic environment in China has Total Retail Sales 3-Month Average & y-o-y growth brought about a general downbeat sentiment in the market. 50 40% Total Retail Sales (3-Month Average) 30% . Rental growth has decelerated 40 Y-o-Y % Change (Retail Sales 3-Month Average) further this quarter as Landlords 20% become more accommodating. 30 Rental growth should still be Bn 10% y change y - HK$ o positive, although slight, with - 1 20 y rental decreases unlikely given 0% the strong interest in this key 10 retail market. -10% 0 -20% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Census & Statistics Department © 2013, CBRE, Group Inc. Q2 2013 RETAIL SALES AND OCCUPIER DEMAND LEASING DEMAND IS QUIET Hong | Kong PrimeRetail As more Mainland tourists arrive, the tourist make-up has continued to shift towards middle-class spenders. While Tourist Arrivals Number & y-o-y growth Mainland Chinese visitors are still a majorly luxury-oriented consumer, demand is rising for mid-range fashion brands. Non-PRC Visitors 5 300% This has helped drive demand for shopping centre space as Number of PRC Visitors high street units are difficult to obtain. Recently, Tommy ) 4 Total Visitors (Y-o-Y % change) Mn 200% Hilfiger from the United States and Collect Point from Japan 3 have leased space in New Town Plaza in Sha Tin. This 100% y change y - 2 o demand for shopping centre space has helped maintain - y No. of Visitors ( Visitors ofNo. sales growth, particularly in more value-oriented locations. 1 0% For example, the Citygate Outlet in Tung Chung, a popular MarketView mall with Mainland Chinese tourists, recorded a 22% year- 0 -100% on-year increase in sales in Q1 2013. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 In addition to land and air tourist arrivals, the opening of the Source: Hong Kong Tourism Board Kai Tak cruise terminal in June has given local shopping centres a supplementary channel to drive foot traffic. The Tourist Spending Mainland & All Others first mooring by Royal Carribean’s Mariner of the Seas HK$ Bn released more than 3000 passengers into Hong Kong. As 300 multiple moorings per month are already scheduled and a All Other Countries Tourist Spending second terminal slated to open in mid-2014, this extra 250 Mainland China Tourist Spending source of visitor arrivals should help support sales figures in 200 local shopping centres (e.g. Megabox, APM, Plaza Hollwood 150 and Mikiki) going forward. 100 Leasing market subdued 50 Leasing demand was relatively quiet over the second 0 quarter. Retailers have been hesitant to expand given the 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 slower retail sales growth in the non-luxury sector and high Source: Hong Kong Tourism Board rentals. The softer economic environment in China has also weakened sentiment in the market. In fact, industrial demand for warehouse space, which had been boosted by Retail Sales Breakdown y-o-y growth retail demand, also fell during the quarter, further demonstrating retailers’ cautiousness. y-o-y growth Although overall leasing demand is softer, local jewellery Department Stores and cosmetics retailers have been relatively active in the Electrical goods and photographic equipment retail market. Riding on the ever-increasing number of Medicines and cosmetics Mainland Chinese tourists, these brands are keen to Wearing apparel increase their retail footprint in many of the prime shopping areas. For example, local jewellery retailers Chow Tai Fook Jewellery, watches & valuable gifts and Chow Sang Sang have leased space in Causeway Bay. Footwear and accessories In addition, local cosmetics brands Sasa and Bonjour Furniture and fixtures continue to expand aggressively, taking space on Canton Supermarkets Road. Besides these select local retailers, there was some Other consumer goods foreign activity from Arte Madrid and Cocomojo in Central; Food, alcoholic drinks and tobacco Rado in Causeway Bay; and Watson’s in Mong Kok. All Retail Outlets However, the majority of these leases were renewals or relocations as expansionary deals were rare from the -20% -10% 0% 10% 20% 30% 40% 50% international retailers. In general, many retailers are opting to wait for the right space to become available. Jan - Dec 2011 Jan - Dec 2012 May-13 2 Source: Census and Statistics Department © 2013, CBRE, Group Inc. RENTAL PERFORMANCE Q2 2013 RENTAL GROWTH POSITIVE BUT WEAK Hong | Kong PrimeRetail Consumer Confidence Hong Kong Landlords begin renovations, reacting to large space requirements 150 According to the How Global is the Business of Retail report, Nielsen Consumer Confidence Index published by CBRE, 51 new retailers entered the Hong Kong market in 2012, demonstrating the desire among retailers to 100 establish a presence. Ralph Lauren, for example, recently Index opened their first flagship men’s only store in Asia on the ground floor of the Prince’s Building. However, finding an adequate unit in a correct location is a major challenge. 50 New market entrants and expanding brands often seek to 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 establish a flagship store in the market but many of the MarketView Values above 100 indicate optimism while those below reflect pessimism prime spots have already been secured. Units with a wide Source: Nielsen shop front; ground-floor; and prime location rarely become available, leaving retailers with few choices. Retail Sales vs MLC Tourist Arrivals y-o-y growth Landlords have started to react to this demand and have begun to re-configure space to create larger retail units. For 60% MLC Tourist Arrivals 3-Mth Avg (y-o-y change) example, multiple shops in Causeway Bay and Tsim Sha Tsui Retail Sales Value 3-Mth Avg (y-o-y change) are being combined to create larger spaces for potential 40% tenants. With quality space scarce, these renovations should be welcomed by the market as they give retailers, especially 20% international ones with larger space requirements, more 0% options. -20% Rental growth continues to decelerate 2005 2006 2007 2008 2009 2010 2011 2012 2013 Rental growth remains relatively weak as retailers continue Source: Census & Statistics Department, Hong Kong Tourism Board to fight high rents and slowing retail sales growth. As a result, landlords have started to become more Prime Rent vs Retail Sales y-o-y growth accommodating, willing to wait multiple months for retailers to make their decisions. In 2010/11, when demand was robust and luxury spending was growing 40-50% per year, 40% Prime Rental (y-o-y growth) landlords usually would not hesitate to rent out space to the 30% Retail Sales Value (y-o-y growth) quickest decision maker.