If megadeals often signal the peak of a market, then Hong Kong landlords may soon be in for a shock.
Spanish fashion brand Zara opened a new flagship store on Friday in Hong Kong’s city centre, in what will be one of the largest single brand shops in the city.
But the timing could prove precarious, with recent data showing that the decade-long boom in the city’s retail sector – driven by fervent demand from visitors from the mainland – may be coming to an end with a thud.
Last year, Chinese tourists accounted for more than a third of total retail sales, and helped make the former colony home to the world’s most expensive shop space.
Noodle joints and barber shops in prime locations were evicted by landlords, who were happy to leave plots empty – thanks largely to record low interest rates – while they waited for rival luxury brands to bid prices higher.
However, signs are growing that the high-end retail market, which drove rental costs up across the city, has turned decisively. In April – the most recent month for which data are available – overall retail sales sank almost 10 per cent in Hong Kong from the previous year, the steepest decline since the depths of the financial crisis in early 2009.
The main culprit was a near 40 per cent year-on-year fall in sales of watches and jewellery, a sign that China’s crackdown on corruption and lavish spending dented demand for luxury goods – the mainstay of Hong Kong’s retail industry – is biting hard.
Retailers on average sold more than $40m of watches and jewellery per day in Hong Kong last year, accounting for 24 per cent of total retail spending.
While some of the April fall is due to a high base figure from the previous year, when many rushed to buy gold as global prices tumbled, it marks the third successive month in which overall retail sales have dropped.
The slowdown has so far been largely confined to the luxury sector, with shopping centres and mid-range stores continuing to see healthy growth. But analysts say many retailers have overexpanded in the city on expectations that sales would continue to increase rapidly, and are now tempering their plans.
“The days of 25 per cent a year sales growth are probably behind us,” says Paul Louie at Barclays.
The fall in spending dovetails with a slowdown in the number of Chinese tourist arrivals, amid rising tensions between Hong Kong and the mainland. Arrivals from the mainland fell 1.5 per cent year-on-year during the recent May holiday break, the first such decline since the Sars epidemic in 2003.
Chinese visitors have been the target of various grievances in recent years, from a shortage of hospital beds and school places in the territory, to a rise in housing costs.
Relations have hit such a low that the Hong Kong government recently proposed cutting the number of mainland Chinese allowed to visit the city each day by 20 per cent, something that is “weighing on the minds of retailers”, says Denis Ma, head of Hong Kong research at JLL.
While Hong Kong’s retail boom has been a bonus for many global brands and local landlords, it has caused a spike in commercial rents that has hit small business owners across the territory.