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       September 2009
       hong kong

       •	   Events	over	the	past	year	have	confirmed	our	long-held	view	that	Hong	Kong’s	
            prime	retail	property	sector	is	highly	resilient.	The	global	financial	crisis,	
            triggered	by	the	burst	of	the	property	market	bubble	in	the	US,	caused	Hong	
            Kong’s	Grade-A	office	rents	to	drop	41.3%	and	luxury	residential	rents	to	fall	
            32.9%	in	the	recent	downturn.	However,	during	the	same	period,	prime	retail	
            rents	dropped	only	11.4%.	Even	at	the	height	of	the	crisis	in	the	fourth	quarter	
            of	2008	and	the	first	quarter	of	2009,	there	were	waiting	lists	for	shops	in	Hong	
            Kong’s	premium	shopping	malls	like	Harbour	City	in	Tsim	Sha	Tsui,	Festival	
            Walk	in	Kowloon	Tong	and	New	Town	Plaza	in	Sha	Tin.	

       •	   After	falling	5.4%	in	the	second	half	of	2008	and	6.3%	in	the	first	four	months	of	
            2009,	prime	retail	rents	began	to	recover	in	May	this	year,	spurred	by	a	global	stock	
            market	rally,	relatively	stable	Mainland	visitor	arrivals	and	better-than-expected	
            local	retail	sales.	So	far,	prime	retail	rents	have	rebounded	about	10%	since	
            bottoming,	while	the	rents	of	some	prime	street	shops	have	already	bounced	back	
            to	levels	last	seen	before	the	collapse	of	Lehman	Brothers	in	September	2008.
September 2009
hong kong

                  •	   After	dropping	33.2%	for	eight	months,	the	average	price	of	prime	street	shops	
                       bottomed	in	February	2009,	two	months	before	the	average	retail	rent	reached	
                       its	trough.	Driven	by	the	loose	credit	policy	of	commercial	banks	and	investors’	
                       improved	risk	appetite,	the	average	price	of	prime	street	shops	has	so	far	
                       rebounded	almost	30%	since	bottoming.

                  •	   Investors	were	keen	to	acquire	retail	properties	as	commercial	banks	started	to	
                       reopen	credit	taps	in	the	second	quarter	of	this	year.	The	number	of	retail	property	
                       transactions	increased	dramatically,	from	429	in	the	first	quarter	to	1,317	in	the	
                       second	quarter.	There	was	also	reemergence	of	large-scale	transactions	worth	
                       over	HK$100	million,	rising	from	only	two	in	the	fourth	quarter	of	2008	to	14	in	
                       the	second	quarter	of	2009.	A	considerable	number	of	these	buyers	were	from	
                       Mainland	China.

                  •	   Towards	the	end	of	the	second	quarter,	almost	all	high-yielding	shops	had	been	
                       snapped	up	and	many	prime	shops	in	core	retail	areas	had	been	absorbed,	
                       forcing	buyers	to	expand	their	search	to	second-tier	locations.	With	prices	
                       rising	faster	than	rents,	the	average	rental	yield	of	retail	property	fell	from	4.8%	
                       in	November	2008	to	4.2%	in	July	2009.	Some	prime	units	were	transacted	
                       at	high	prices,	despite	offering	rental	yields	of	as	low	as	2%,	as	buyers	were	
                       eyeing	higher	potential	rents	upon	the	next	lease	renewal.	With	the	practice	of	
                       gazumping	becoming	prevalent	and	the	gap	between	bidding	and	asking	prices	
                       widening,	transactions	of	retail	properties	began	to	drop	in	July.

                  Major new / expanding tenants
                  •	   A	number	of	international	retailers	entered	Hong	Kong	this	year,	taking	advantage	
                       of	the	territory’s	strategic	position	as	a	stepping	stone	to	the	vast	China	market.	
                       Canadian	shoe	retailer	Aldo	opened	its	first	Hong	Kong	outlet,	covering	over	
                       3,000	sq	ft	of	Central’s	ifc	mall	and	plans	to	open	two	or	three	more	stores	in	
                       Hong	Kong	in	the	next	few	years.	Meanwhile,	men’s	clothing	brand	Harmont	&	
                       Blaine	from	Canada	also	opened	its	first	store	in	ifc	mall.

    ifc	mall      •	   Existing	international	brands	expanded	aggressively	in	Tsim	Sha	Tsui.	H&M	
                       leased	a	45,000-sq-ft	ground-floor	shop	in	the	Silvercord	shopping	centre	in	Tsim	
                       Sha	Tsui	and	another	23,000-sq-ft	shop	in	Cityplaza	in	Tai	Koo	Shing.	Meanwhile,	
                       Italian	leather	bag	retailer	Coccinelle	opened	its	second	store	in	The	Gateway	in	
                       Tsim	Sha	Tsui,	while	Esprit	leased	15,000	sq	ft	of	space	on	the	first	three	floors	of	
                       Yue	Hua	International	Building	in	Tsim	Sha	Tsui.

                  •	   Foreign	burger	chains	seized	the	opportunity	to	increase	their	share	of	Hong	
                       Kong’s	fast	food	market.	Wow!	Burger—the	mass-market	brand	of	the	fast	food	
                       chain	Monster	Burger,	focusing	on	the	take-away	business—opened	a	new	outlet	
    The	Gateway        in	Shau	Kei	Wan	earlier	this	year.	Another	seven	Wow!	Burger	branches	will	open	
                       in	2009.	Burger	King,	which	re-entered	Hong	Kong	in	2007,	will	open	outlets	in	
                       Hung	Hom,	Sha	Tin,	Wong	Tai	Sin	and	Causeway	Bay.	It	plans	to	add	20–25	stores	
                       to	Hong	Kong	in	the	coming	two	years.

                  •	   The	increased	choice	of	available	shops	benefited	large-space	occupiers.	Wellcome	
                       supermarket,	for	instance,	grasped	the	opportunity	of	relatively	low	rents	to	enter	
                       second-tier	districts	including	North	Point,	Aberdeen,	Choi	Hung,	Tsuen	Wan	
                       and	Yuen	Long.	Next	July,	Ikea	will	relocate	its	flagship	store	from	Telford	Plaza	in	
                       Kowloon	Bay	to	the	nearby	MegaBox	complex,	taking	up	the	138,000	sq	ft	of	space	
    Wellcome           to	be	vacated	by	B&Q	and	increasing	Ikea’s	flagship	store	size	by	over	70%.


                  Major renovation projects
                  •	   The	two-year	renovation	of	the	World	Trade	Centre	mall	in	Causeway	Bay	(since	
                       renamed	wtc	more)	was	completed	in	the	second	quarter	of	2009.	The	HK$200-
                       million	project	enlarged	the	mall’s	floor	space	from	160,000	sq	ft	to	280,000	sq	
                       ft,	while	increasing	the	number	of	retail	levels	from	six	to	14	and	the	number	of	
                       shops	from	64	to	82.	The	mall	has	now	reached	100%	occupancy	and	currently	
                       generates	HK$200	million	of	rental	income	a	year,	an	increase	of	18%	since	
 Wtc	more	mall         renovating.	Daily	pedestrian	flow	has	also	grown	from	about	50,000	to	60,000.

                  •	   The	revitalisation	of	The	Repulse	Bay	in	Island	South	commenced	in	February.	
                       The	project	includes	the	introduction	of	new	shops,	the	refurbishment	of	food	
                       and	beverage	facilities	and	the	opening	of	a	Historical	Gallery.	While	phase	one	
                       of	the	project	(from	February	to	August	2009)	involved	the	revitalisation	of	public	
                       spaces,	shops,	restaurants	and	landscapes,	phase	two	(from	August	to	November	
                       2009)	will	involve	the	installation	of	a	new	English-style	marquee.	Upon	
                       completion,	The	Repulse	Bay	Arcade	will	house	a	branch	of	gourmet	supermarket	
                       Market	Place	by	Jasons;	day	spa	Sense	of	Touch	and	upmarket	Australian	
 apm                   children’s	wear	brand	Seed.

                  •	   To	maintain	an	up-to-date	image	to	attract	its	target	younger	market,	the	four-
                       year-old	apm	mall	in	Kwun	Tong	will	be	renovated	with	a	restructured	tenant	mix,	
                       from	mid	2009	to	mid	2010.	The	HK$40-million	project	will	take	Japan’s	Tokyo	
                       Midtown	as	a	blueprint.	An	escalator	will	be	installed	to	provide	better	access	to	
                       the	food	court;	decorative	pattern	and	lighting	will	be	added	to	the	concourses,	
                       staircases	and	walls;	the	centre’s	150	plasma	and	LCD	screens	will	all	be	replaced	
                       by	high-definition	LCD	screens	and	the	“mega-screen”	will	be	enlarged	by	50%	to	
                       cover	400	sq	ft,	becoming	the	largest	indoor	LED	screen	in	Hong	Kong.

                  Major supply
                  •	   Over	480,000	sq	ft	of	retail	property	space	was	completed	in	the	first	seven	
                       months	of	2009,	an	increase	of	220.9%	from	the	about	150,000	sq	ft	completed	
                       over	the	same	period	in	2008.	Retail	supply	is	forecast	to	almost	double	from	
                       531,000	sq	ft	in	2008	to	over	a	million	sq	ft	in	2009.	In	2010,	another	972,000	sq	
                       ft	of	space	will	enter	the	market.	Four	new	shopping	centres	are	slated	to	open	in	
                       Tsim	Sha	Tsui	by	the	first	quarter	of	2010—namely	iSquare,	K11,	1881	Heritage	(the	
 The	One               Marine	Police	Headquarters	redevelopment)	and	The	One	(the	Tung	Ying	Building	
                       redevelopment)	—providing	a	total	space	of	over	1.4	million	sq	ft.

                  •	   After	five	years	of	preservation	and	refurbishment,	at	a	cost	of	HK$1	billion,	the	
                       130,000-sq-ft	1881	Heritage	shopping	centre	in	Tsim	Sha	Tsui	has	leased	90%	of	
                       its	retail	space.	Confirmed	tenants	include	Cartier,	Piaget,	Van	Cleef	&	Arpels	and	
                       Tiffany	&	Co	and	the	mall	should	be	fully	open	by	October	2009.	Meanwhile,	The	
                       One,	which	will	measure	over	400,000	sq	ft	and	house	a	cinema,	is	scheduled	to	
                       open	in	the	first	quarter	of	2010.

                  •	   Leasing	of	the	three-storey	Citywalk	2	shopping	mall	in	Tsuen	Wan	commenced	
                       in	the	first	half	of	2009.	Spanning	200,000	sq	ft,	Citywalk	2	will	provide	about	
                       170	retail	units	and	accommodate	the	33,000-sq-ft	GH	Citywalk	cinema—the	first	
                       fully-digital	cinema	in	Hong	Kong,	offering	700	seats	in	five	houses.	Targeting	
                       medium-income	earners,	Citywalk	2	will	focus	on	entertainment	and	necessities,	
                       complementing	the	first	phase,	which	is	mainly	occupied	by	fashion	brands.

September 2009
hong kong

                                	   Market outlook
                                •	      The	year-on-year	fall	in	retail	sales	volume	narrowed	from	13.9%	in	February	to	
                                        5.4%	in	July,	while	the	decline	in	retail	sales	value	also	slowed	over	the	same	
                                        period,	from	12.7%	to	5.5%.	We	expect	the	drop	in	retail	sales	to	further	slow	
                                        in	the	third	quarter,	in	line	with	Hong	Kong	Retail	Management	Association’s	
                                        forecast	that	retail	sales	should	record	mild	growth	in	the	fourth	quarter.

                                •	      According	to	Hong	Kong	Tourism	Board,	the	average	hotel	occupancy	rate	
                                        rebounded	significantly	to	71%	in	July,	from	61%	in	June.	The	occupancy	rate	is	
                                        expected	to	be	over	80%	in	the	fourth	quarter,	in	line	with	an	expected	increase	
                                        in	Mainland	visitors.	Meanwhile,	the	local	labour	market	showed	signs	of	
                                        stabilising.	According	to	a	survey	conducted	by	a	recruitment	consultant,	the	
                                        percentage	of	companies	planning	to	increase	headcount	in	the	third	quarter	
                                        grew	to	22%,	compared	with	14%	in	the	previous	quarter.	In	addition,	the	
                                        wealth	effect	from	the	revival	in	global	stock	markets	will	also	boost	consumer	
                                        confidence	and	lend	support	to	the	retail	market.

                                •	      The	global	economy	has	shown	signs	of	revival.	To	sustain	the	recovery,	which	
                                        will	be	fragile	during	its	early	stages,	the	central	bankers	around	the	world	are	
                                        expected	to	keep	interest	rates	at	low	levels	until	mid	2010.	This	will	inevitably	
                                        stimulate	local	asset	inflation,	including	retail	property	prices.	Meanwhile,	shop	
                                        rents	are	expected	to	rise	quicker	than	the	business	volume	of	many	retailers,	
                                        as	landlords	have	started	to	raise	rents	aggressively.	Profit	margins	of	retailers,	
                                        therefore,	are	expected	to	be	under	pressure	in	the	next	few	months.

                                Hong Kong Retail
Hong Kong Retail                     Table	1

Management Association               Key economic indicators

expects retail sales to              Economic indicator                                  Jul 2009         Q2 2009      Q1 2009   2008

rebound in the fourth quarter        Retail sales volume (year on year)
                                                                                          -5.4%#           -5.4%       -5.4%     +5.0%
of 2009.                             Restaurant receipts (year on year)
                                                                                           N/A            -0.7%#       +1.4%     +13.1%

                                     Median monthly household income
                                     (year on year)                                        N/A             -2.8%       -2.2%     +4.0%

                                     Visitor arrivals (year on year)
                                                                                          -12.2%           -8.9%       +1.8%     +4.7%

                                                                                    5.4%#	(Jun-Aug)         5.3%        4.9%     3.6%

                                     Inflation rate (year on year)
                                                                                          -1.5%            -0.1%       +1.7%     +4.3%

                                     Source:	Knight	Frank	/	Census	&	Statistics	Department	/	Hong	Kong	Tourism	Board
                                     #	provisional	figure


                                 Selected transactions

The demand for prime ground-      Table	2
floor shops is gathering pace.    Selected leasing transactions

                                  District       Building        Floor /        Area        Rent         Rent             Tenant
                                                                  Unit         (sq ft)     (HK$ /       (HK$ /
                                                                                            mth)       per sq ft)
                                  Causeway	    Percival	         G/F	/	                                 $879.1	     Milan	Station	
                                                                                182       $160,000
                                  Bay          House             unit	K                                  (net)      (Causeway	Bay)
                                  Mong	Kok     Tat	Lee	          G/F	/	
                                               Commercial	       unit	5         95        $52,000       $547.4      Sky-Keen
                                  Mong	Kok     Wingco	           G/F	/	                                 $471.8	     Vevion	Hong	
                                                                                195       $92,000
                                               Mansion           unit	3                                  (net)      Kong
                                  Wan	Chai     Fully	            G/F	/	
                                                                                543       $225,000      $414.4      N/A
                                               Building          unit	6
                                  Tsim	Sha	    Wing	Lok	         G/F	/	                                 $444.4	     Chung	Kiu	
                                                                                225       $100,000
                                  Tsui         House             unit	1                                  (net)      Medicine	Co

Large-scale retail property       Table	3
transactions worth over           Selected sales transactions

HK$100 million reemerged in       District            Building             Floor / Unit    Area        Price            Price
                                                                                          (sq ft)   (HK$ million)   (HK$ per sq ft)
the second quarter of 2009.
                                  Tsim	Sha	    Alpha	House                   G/F	/
                                                                                           565         $106           $187,611
                                  Tsui                                      unit	E1
                                  Tsim	Sha	    Mirador	Mansion               G/F	/	
                                                                                           655         $113           $172,519
                                  Tsui                                       unit	5
                                  Tsim	Sha	    Hankow	Centre	                G/F	/
                                                                                           770         $125           $162,338
                                  Tsui         Arcade                       unit	13
                                  Causeway	    Lai	Yuen	                     G/F	/
                                                                                          1,430        $193.8         $135,524
                                  Bay          Apartments                   unit	B5
                                  Wan	Chai     Goodfit	Commercial	           G/F	/	
                                                                                           97          $12.4          $127,835
                                               Building                      unit	5
                                  Mong	Kok     Hung	Tat	Building             G/F	/	
                                                                                           114         $13.8          $121,053
                                                                             unit	6
                                  Causeway	    5–11	Lee	Garden	              G/F	/
                                                                                          934          $100           $107,066
                                  Bay          Road                         unit	54

                                   Source:	Economic	Property	Research	Centre	/	MWPIC	System
                                   Note:	All	transactions	are	subject	to	confirmation.


Americas          Hong Kong contacts
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                  Livian Har
Australasia       Director,	Retail	Services
Australia         +852	2846	9543
New	Zealand       livian.har@hk.knightfrank.com

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                  Director,	Head	of	Research
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                  +852	2846	4819
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                  Research	Manager
                  +852	2846	4843
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