By: Ming Lok Lam* and Susheela Rivers* (Hong Kong)

In Hong Kong, reports have shown that the retail market is beginning to revive in the second half of 2016. This is unsurprising given the undeniable fact that Hong Kong is unique in real estate given that space is scarce and demand rarely decreases.

The Hong Kong retail real estate market is currently encountering what the locals refer to as a “severe winter.” The biggest victims have been luxury brands. Since the beginning of 2016, a number of powerhouse fashion retailers in sectors ranging from jewellery to watchmaking have been forced to close their stores in prominent shopping areas in Hong Kong. This event is the result of various factors, including:

  • the steady rise of the US dollar (to which the HK dollar is pegged) as compared to the relatively weaker RMB and Euro, making shopping in Hong Kong more expensive for mainland Chinese and Europeans than a few years back
  • the falling number of mainland Chinese tourists and
  • the plunge of retail sales in Hong Kong by 10.5 percent in the first half of 2016 when compared to the same period in 2015 (the worst statistics that shopping has experienced since 1999).

Retailers have reacted to the slump in a number of various ways. Some brands have successfully negotiated a rent reduction, given that landlords would prefer to keep luxury brands in their property to maintain the property value rather than see them “go dark”. Other brands have also adopted creative approaches to negotiation, including partial surrender of stores, adding variety to the merchandise (e.g. adding a sub-line) and committing to a longer lease term with reduced rent.

A silver lining in the wider real estate market lies with real estate investment. Since the beginning of 2016, acquisition has been active particularly in the office sector, with mainland investors taking the driver’s seat. It was reported by international property consultant Knight Frank that mainland companies paid a total of US $2.9 billion for grade-A office space in the first half of 2016, representing 64 percent of the total office sales transactions. By way of comparison, over the past decade, mainland companies have acquired offices worth around US $6.4 billion in the city. The upward trend in 2016 is substantial.

The phenomenon is fuelled by the long term investment prospect of offices in Hong Kong. Statistics indicate that as at summer 2016, there was only a 1.6 percent office vacancy rate in Central (CBD in Hong Kong). Office rents have soared in the past years despite an increase in supply of office areas outside the CBD. Major players including investment banks, international law firms and Chinese state-owned enterprises are inclined to stay in the prestigious area.

* Susheela Rivers is a partner and Min Lok Lam is an associate in DLA Piper’s Real Estate practice, based in Hong Kong.