Hong Kong Prime Retail Marketview Q3 2012 CBRE Global Research and Consulting

Hong Kong Prime Retail MarketView Q3 2012 CBRE Global Research and Consulting

RENTS RETAIL SALES VISITOR ARRIVALS CONSUMER CONFIDENCE Rents +7.9% YTD Sales +11.0% y-o-y Visitors +20.5% y-o-y Confidence +21.9 index pts

FURTHER CAUTION FROM OCCUPIERS AND EARLY SIGNS OF RISK FACTORS FOR LANDLORDS

Hot Topics A shift in tourist spending Spending on luxury items has slowed considerably, even fallen in some cases, . A certain de-coupling may be Tourist arrivals continued to grow at a over the last 12 months. Sales happening between growth in fast pace in Hong Kong, rising by 20% volumes of jewellery and watches, for tourist visitor numbers and tourist y-o-y in August. However, spending by example, have fell by 7.9% y-o-y in spending. Arrivals remain healthy, mainland Chinese visitors has eased as August. Indeed, one could take this as with Mainland tourists showing the home economy has slowed. a reflection of the cooling in demand According to the Travel Industry 18 straight months of double from Mainland Chinese visitors for Council and Bloomberg, average digit growth, but tourist spending more expensive items. This was also is unable to keep pace. This may mainland tourist expenditures have apparent in the downbeat reaction in reflect a slowdown in the fallen from HK$6,000-7,000 to the market to “Golden Week”, a time mainland Chinese economy, but HK$5,000-6,000. when mainland visitors normally give a also perhaps a shift in the type of A noticeable slowdown in the significant boost to the local Hong mainland visitor to Hong Kong. luxury sector Kong economy. Interestingly, demand for some luxury goods has fallen Retail sales values continued to grow Subdued leasing market compared to last year while but closer examination of the data Following on from the deceleration in purchases of more staple items reveals signs of sluggishness. Sales retail figures, leasing volume slowed in has continued to grow. volumes, which strips out inflationary Q3. While this may also be due to a effects, fell slightly month-on-month in lack of available leasing opportunities August and showed year-on-year in prime areas, there are signs that . The leasing market has been growth of just 3.2%. Set against the deals are taking longer to complete as quiet recently as a result of an double digit growth seen through out landlords in general have yet to adjust overall slowdown in retail 2011 the deceleration in the sector their expectations. For example, a spending and a lack of vacant becomes apparent. In fact, it is the very pocket space in Central has been on units in prime locations. Pricing driver of growth in previous years the market for two months but the of units that are vacant is also which is dragging performance in the landlord has so far been unable to becoming more of an issue as second half of 2012. many occupiers are now lease the unit. reluctant to bid higher to secure space. Retailers have also Total Retail Sales 3-Month Average & y-o-y growth become more selective in choosing locations.

50 40% . While the overall market remains Total Retail Sales (3-Month Average) healthy, risk factors for landlords Y-o-Y % Change (Retail Sales 3-Month Average) 30% have certainly increased. There is 40

evidence to suggest that a 20%

number of mid-range fashion 30

retailers are willing to enter the Bn 10%

y change y

HK$

o - 1 market should rents soften. As yet, 20 y while some landlords have 0% lowered their rental expectations 10 on lease expiry, the asking rent is -10% still significantly above the 0 -20% current passing rent. 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Census & Statistics Department

Retail sales growth is weaker Tourist Arrivals Number & y-o-y growth After a strong year of double digit growth in 2011, retail Non-PRC Visitors sales growth has fallen to single digits in 2012. The luxury 5 300%

market has taken the brunt of the slowdown, showing the Number of PRC Visitors

Prime RetailPrime |

largest drop in sales. Consumers are holding off on ) 4 Total Visitors (Y-o-Y % change) Mn

200% purchasing big ticket items such as jewellery & watches (- 3

7.9% y-o-y); motor vehicles (-1.0% y-o-y); and furniture & 100%

y change y -

2 o -

fixtures (-6.9% y-o-y). However, other sectors such as y No. of Visitors ( Visitorsof No. medicine & cosmetics (+15.8% y-o-y) and supermarket 1 0%

products (+7.4% y-o-y) continue to do well. MarketView 0 -100% Spending is not keeping pace with tourist arrivals 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Tourist arrivals continued to grow at a healthy rate but the Source: Hong Kong Tourism Board appetite to spend has not kept pace with the increase in the

number of visitors. While tourist arrivals have risen 20% Tourist Spending Mainland & All Others year-on-year through to August, tourist spending has HK$ Bn decreased. There are signs that Mainland Chinese tourists, 250 one of the main drivers of retail sales, have started to spend Forecasted Spending less. For example, during the recent Golden Week, overall 200 All Other Countries Tourist Spending sales growth slowed from 17.5% in 2011 to 15.0% in 2012. Mainland China Tourist Spending 150 Domestic demand is quite resilient but movements in the 100 labour market should be monitored. Generally speaking, the labour market remains healthy with seasonally-adjusted 50 unemployment of just 3.3% for the period July to September. However, banks and financial institutions have been going 0 through rounds of job cuts and there may be more to come. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F Other professional firms have reportedly requested their Source: Hong Kong Tourism Board, CBRE employees to take unpaid leave. While all of this may not make a significant impact on overall unemployment number, Retail Sales Breakdown y-o-y growth it certainly does reduce the number of above average earners and those with a higher level of disposable income. y-o-y growth Existing occupier demand has softened Electrical goods and photographic equipment Despite slower retail sales and weaker recent leasing activity, Jewellery and watches retailer demand is still strong and the best units are snapped Clothing, footwear and allied products up when they become vacant. Looking ahead, we are likely All Retail Outlets to see retailers become more selective in their approach and Medicines and cosmetics this should reduce the pressure we see at the top end of the market. While there are reports of some retailers seeking to Department stores surrender space this is more likely due to some location Furniture and fixtures specific issues. Motor vehicles and parts Supermarkets Risk factors have certainly increased for landlords and the ability to achieve a significant increase in rents upon lease Books, newspapers, stationary and gifts expiry has diminished. Some retailers are either unable or Food, alcoholic drinks and tobacco unwilling to pay higher rents on lease expiry, particularly in -10% -5% 0% 5% 10% 15% 20% the face of competition from higher margin businesses. Retail banks, together with F&B outlets, are particularly Volume (real) Value (nominal) exposed and some are being pushed out to alternative locations, either on a higher floor or onto a different street. 2 Hang Seng Bank has moved from Central Building to Lok Source: Census and Statistics Department Yew Building, next to Mossimo Dutti with a reported 200%

Consumer Confidence Hong Kong hike in rent acting as a major incentive to relocate. In addition, a children’s store is vacating its location in Sai Yee St., Mong Kok due to a doubling in the asking rent. 100 Index

Quieter letting activity this quarter Prime RetailPrime | A combination of cautious retailers and firm landlords, 50 together with a lack of supply, has led to a subdued leasing market. Aside from the opening of a new shopping centre, Hysan Place in Causeway Bay, very few deals have been

0 completed. Of these, shoe shops Millie’s and Belle Shoes

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 continued to expand and compete for better locations. MarketView Consumer Confidence Index However, none of these deals were for space of more than Source: Mastercard Worldwide Consumer Confidence Index 1,000 sq ft. In addition, the majority of retail leases are still under contract and not due to renew. With limited stock to Unemployment Rate Seasonally Adjusted choose from, few upcoming major lease renewals and

slower demand, the volume of leasing deals is not expected to show a significant improvement over the coming months. 9% 8% Slower rental growth is expected going forward 7% 6% Given the more cautious approach being exercised by some 5% occupiers, and the inability of others to pay high rents, prime 4% 3% rental growth unsurprisingly continued to decelerate during 2% Q3. However, the rate of deceleration over recent quarters 1% has perhaps been greater than at first anticipated. Prime 0% retail rents rose by 2.4% q-o-q in Q3 compared to a rate of 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 5.4% in Q4 2011. As such, the rate of year-to-date growth Source: Census & Statistics Department has slowed to 7.9% as of end Q3 2012 compare with the 22.3% YTD growth in Q3 2011. Prime Rent vs Retail Sales y-o-y growth Average prime retail rents increased and stood at HK$646 psf at the end of the Q3. The highest average rent can be 40% Prime Rental (y-o-y growth) found in Causeway Bay at HK$745 psf, which rises to 30% Retail Sales Value (y-o-y growth) HK$1,700 psf if just Russell Street is considered. However, the strongest growth recorded was in Tsim Sha Tsui where 20% average rents rose by 4.1%. This was due to the relatively 10% higher activity in the area, particularly from mobile phone 0% operators and cosmetic shops seeking to expand. At the other end of the scale, Central was the weakest performer as -10% rents remained essentially flat. -20% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 The deceleration in rental growth is likely to continue going forward as (i) luxury retailers are showing some reluctance to Source: Census & Statistics Department, CBRE continue to pay price rises, and (ii) some mid-range fashion brands show an interest in Hong Kong but baulk at the high Prime Retail Rent Indices by district prices. In the case of the latter, they continue study the market but have yet to make a decisive step. On a positive note for some landlords, as retailers seek alternatives to high 300 Central Causeway Bay rents in prime locations then we could see further rental 250 Tsim Sha Tsui Mong Kok growth in decentralised or secondary areas. This could 200 indeed generate its own momentum as the retail fabric of some streets changes due to the entry of more recognised 150 retailers. 3 100 3

Index (1996 Q1 = 100) = Q1 (1996 Index 50 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: CBRE

KEY MARKET DATA

Prime RetailPrime |

MarketView

Tsuen Wan Line Island Line Tseung Kwan O Line Kwun Tong Line Airport Express O Line

Selected leading transactions in Q3 2012

Size Tenant District Property Street No. Street Name Unit/Floor Size (sf) (Gross / Net)

Fossil Causeway Bay Hong Kong Mansion 1-1L Yee Wo Street Shop X, Y, G/F 1,000 Gross

Belle Shoes Causeway Bay Po Hon Building 24-30 Percival Street Shop B, G/F 628 Net

A-Land Causeway Bay The Lee Theatre Plaza 99 Percival Street 1/F 8,180 Lettable

Millie’s Causeway Bay 520 Lockhart Road 520 Lockhart Road G/F 1,005 Gross

Hang Seng Bank Central Loke Yew Building 50-52 Queen’s Road Central B/F 3,326 Gross

Laneige Mong Kok Fook Tai Building 24-26 Soy Street Shop 2, 3, 4, G/F 540 Net

One2free Tsim Sha Tsui The Bodynits Building 3 Cameron Road G/F 1,529 Gross

The Body Shop Tsim Sha Tsui Sands Building 12 Peking Road Shop C, G/F 612 Gross

Rado Tsim Sha Tsui Mirador Mansion 54-64B Nathan Road Shop 1, G/F 1,000 Gross

I.T Group Tsim Sha Tsui Silvercord 30 Canton Road Shop B2, B/F 16,810 Gross

For more information about this Hong Kong MarketView, please contact:

Hong Kong Research Edward Farrelly

Prime RetailPrime | Director Hong Kong Research CBRE 4/F Three Exchange Square 8 Connaught Place

Central, Hong Kong

MarketView t: +852 2820 2886 e: [email protected]

For more information about opportunities in the Hong Kong retail market, please contact:

Hong Kong Retail Services Joe Lin Senior Director Hong Kong Retail Services CBRE 4/F Three Exchange Square 8 Connaught Place Central, Hong Kong t: +852 2820 2860 e: [email protected]

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Disclaimer 5 © 2012 CBRE HK Limited. CBRE HK Limited confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.