According to a new retail report released by JLL, Hong Kong's retail rents are unlikely to return to their historical market peaks in the coming five years due to the six key challenges ahead. To speed up the pace of recovery of the retail market and regain its competitive advantage, it is crucial for landlords and retailers to collaborate in reshaping the retail space by providing a diverse range of unique retail offerings and embracing the concept of experiential retailing.
The report - titled "Reset, Reshape and Rethink: Find Opportunity in Change" - conducted two rounds of surveys of 720 consumers (202 consumers in the first round, 518 consumers in the second round) and 108 retail operators in 2022 and 2023 and identified six major challenges facing Hong Kong's retail market:
Embracing experiential retailing
Oliver Tong, Head of Retail at JLL in Hong Kong, said: "The reopening of borders has eliminated the major negative factors affecting Hong Kong's retail market. However, the shopping behaviours of both domestic consumers and inbound tourists have undergone changes over the past three years. At the same time, the operational models and tenant mix in shopping malls of nearby cities have improved significantly, intensifying the competition that Hong Kong is facing, similar to the situation faced by mainland Chinese shopping centre landlords a few years ago,"
The rise of online shopping and sharp increase in new retail space supply several years ago in mainland China prompted landlords to creatively diversify the tenant-and-trade mix within their retail portfolio. They introduced experiential tenants such as zoos, sports arenas and art exhibitions. Shopping malls are no longer just places for shopping. Our figures show that about 20% to 25% of new lettings in Shanghai's shopping malls are experiential tenants in the first three quarters of this year. In Beijing, about 35% of shopping mall new lettings are experiential tenants in the first half of 2023, 17 percentage points more than that during the same period in 2022.
"Shopping centre landlords in Hong Kong could introduce unique experiential retail tenants as a catalyst for a sales rebound in their shopping malls," Tong added.
Partner with tenant
"The major challenge identified by a majority of tenants is the rental levels. It is worth noting that the high rents in Hong Kong reflect the higher sales productivity compared to other cities in Asia Pacific. However, high rents inevitably hinder creativity and limit the entry of experiential retailers and new concept brands with lower rental affordability. It is the reason why the tenant mix in Hong Kong's shopping malls remains monotonous. To address this, landlords should consider adopting more flexible leasing arrangements and forging strategic partnership with forward-thinking tenants who are keen on investing more to introduce innovative concepts and deliver enhanced shopping experiences to entice consumers. By collaborating with such tenants, landlords can infuse new shopping concepts and choices into their malls, focusing on investing into the future rather than prioritising rental rents. Also, by introducing unique tenants to increase foot traffic, rental income could be secured, ultimately achieving a win-win situation," Tong added.
Increasing the variety of retail offerings
Cathie Chung, Senior Director of Research at JLL, said: "Consumers prefer more mom-and-pop stores (51%), unique cuisine restaurants (42%), and better consumer service (41%) in Hong Kong's retail market. This reflects consumers' desire for a new and unique experience in shopping malls. Shopping centre landlords can attract consumers by introducing new brands and types of retailers, while chain stores should develop diversified business lines. Furthermore, shopping centre landlords can offer one-stop services to support their tenants in shop front design, product display and various consultancy services to ensure the quality of their tenants' offering and uniqueness,"
Chung expects rental levels will undergo a long process to recover to the levels before the pandemic. High street rents dropped 41.0% during the COVID between 2020 and 2022, and are now 72.5% lower than the market peak in 2014, according to the JLL rental index. Under the existing market situation and outlook, we expect the retail rental will less likely return to the historical market peak levels within the next five years. It may not necessarily be a good thing for consumers even if it were to return to historical peak as the tenant diversification of shopping malls could be limited when shops are rented out only to the highest bidder. A key pre-requisite for Hong Kong's retail market to regain the shine is that retail rentals in the city stay relatively affordable to enable experiential retailing, and to provide right-size shops to encourage the development of new concepts.
"It is crucial for landlords, operators, key stakeholders and influencers to collaborate and leverage the city's unique strengths. This collaboration should be underpinned by appropriate government policies. Unleashing synergies across industries, such as the retail and entertainment industries, will be instrumental in maximising the economic benefits for the entire Hong Kong economy. We firmly believe that the city's retail landscape will regain its spotlight on the global stage in the near future," she said.