As we enter 2013, Hong Kong’s economy appears to be gathering momentum, once again. After growing by just 1.4% in 2012, the slowest rate of growth since the Global Financial Crisis, most economists have penciled in real GDP growth of about 3.0% y-o-y in 1Q13. Leading the recovery has been the retail sector. Retail sales through the first two months of the New Year were up by 15.8% y-o-y, more than double the 7.6% y-o-y growth recorded in 4Q12, and with growth visibly stronger across all consumer items.

Retail sales have been supported by a tight labour market, the seasonally adjusted unemployment rate stood at just 3.5% at end-1Q13, and the steady growth in visitor arrivals, which was up by 13.5% y-o-y in 1Q13. Visitor arrivals from mainland China, Hong Kong’s largest tourist market, grew by 20.3% y-o-y over the same period with those visiting the city using the Individual Visit Scheme growing by 23.1% y-o-y. What makes these early set of numbers even more promising is that growth has been achieved with very little support from the city’s investment markets and a continuing slowdown in China’s economy, which grew by just 7.7% y-o-y in 1Q13.

Led by the robust growth in retail sales, the city’s retail leasing market was vibrant and continued to be well supported by steady tenant demand. International retailers remained positive on the outlook for the city’s retailing sector, with many still viewing Hong Kong as being an essential part of their broader China growth strategy. Interestingly, Hong Kong is also fast becoming a popular entry point for mainland Chinese brands looking to expand their business into international markets.

In spite of the optimism in the market, retailers generally remained cost sensitive, especially with rents entering the New Year at record high levels. In the majority of cases, retailers were either unable or unwilling to commit to higher rents, opting to lease smaller shops in traditional core retailing locations or opening stores in off-prime locations. The growing hesitancy among retailers to chase higher rents resulted in rental growth moderating in 1Q13.

The limited availability of retailing premises and high asking rents in traditional prime retailing locations also continued to drive leasing demand into secondary streets. Gough Street in Sheung Wan, for example, is now packed with international retailers and high-end restaurants due in part to its proximity to SOHO precinct. Likewise, Yiu Wa Street in Causeway Bay, has been attracting strong interest from retailers with retailer UGG more recently announcing plans to open a flagship store on the street. Others are choosing to set-up shops in shopping centres further afield, in areas such as Shatin, Yuen Long, Tuen Mun and Tseung Kwan O. Renowned lingerie brand, Victoria’s Secret, for example, will be opening one of their two new shops in 2013 in Shatin New Town Plaza.

Tom Gaffney
National Director & Head of Retail, Hong Kong
Jones Lang LaSalle
Tom.Gaffney@ap.jll.com