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Scarcity of opportunities in core shopping districts steers investors towards street-level shops and retail podiums in decentralised areas
Savvy investors are on the prowl for opportunities in the retail sector. Retail sales are recovering from three-year lows and inbound tourist numbers grew by 3.3% year-on-year in the first five months of the year, signaling to retailers and market-watchers that the bottom of the cycle is near.
"A lot of local investors, including institutional investors, are jumping into the retail market right now, trying to get in ahead of the recovery, and we expect the number of investors entering the market to continue to rise," says Denis Ma, our Head of Research.
Still, Ma admits that the retail market looks "soft." Although high street shop yields have been anchored at around 2.4% since 2013, capital values of high street shops are forecast to decrease 5-10% this year. However, he says, this is precisely the reason why we're seeing more investment activity: "Retail is the only sector in which prices are correcting in line with fundamentals."
We expect capital values to rise by less than 5% in 2018, and anticipate rents will bottom out in the second half of this year, before rising gradually over the next 12-36 months.
While the retail property market will bottom out in 2017, we foresee an L-shaped recovery ahead. Mainland China tourists are spending less per head than they were 10 years ago and the strongest demand is from mid-range retailers, including F&B, cosmetics, and sports brands, that don't have the capacity to pay the high rents we saw back when the market peaked in 2014.
- Denis Ma, Head of Research, Hong Kong
"Landlords can't push rents up too aggressively. So, there is an opportunity for retailers, if they get in early, to secure great locations," says Ma. He adds that potential investors no longer need fear that rental rates will slip below the level they were at when they bought the property—another reason they stayed away from the market.
Eagle-eyed investors are also looking at the retail market from a population growth perspective. Many are exploring new retail podiums in decentralised areas that will benefit from fast-growing residential populations in the coming years. Anchor tenants for these podiums are expected to be food and beverage outlets and those selling daily necessities, including groceries, medicines and healthcare products.
With 6.6 million sq ft of new retail supply scheduled for completion between now and 2021, Ma thinks the key areas to watch will be Tseung Kwan O and self-contained towns such as Yuen Long and Tsuen Wan in the New Territories.
"When a retail property lies within a residential area, retailers have a basic catchment population," says Cathie Chung, National Director with our Hong Kong Research team.
"Tsuen Wan could be a hot location because it not only serves the local area but it has a wider catchment area, making its population big enough to attract retail investors," she adds. The area is also drawing institutional investors, with a locally-based property fund acquiring a 17-storey retail block which serves the daily needs of middle-income shoppers.
Since prime shopping malls rarely come onto the market here in Hong Kong, and there are few high street shops for sale in core shopping areas, retail investment will continue to be mainly focused on street-level shops and podiums in office or residential buildings located in decentralised areas.
Link REIT's retail portfolio has also been attracting local private investors, with one reported to be keen on buying 20 shopping centres. The potential deal sends out a strong signal that forward-looking investors are entering the market before the retail recovery and capital values take flight.
For more information on retail investments, please visit our Investment Sales and Acquisitions web page, or learn more about our Retail services here.
Head of Research, Hong Kong
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National Director, Hong Kong Research
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Senior Manager, Marketing & Communications
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