FIRST PACIFIC Davis: The Hong Kong retail leasing market showed structural recovery in the second quarter, with significant differentiation in the recovery.

FIRST PACIFIC Davis's latest "Hong Kong Retail Leasing Market Report" indicates that the retail market in Hong Kong continued to improve in the second quarter of this year, but the recovery remains narrow-based. The core business districts have benefited from the return of tourists, strong demand for luxury goods, the expansion of flagship stores, and experiential retail formats. Following a rebound in rent during the first quarter, rental prices remained stable in the second quarter. In contrast, shopping centers in non-core areas are still facing pressure from cross-border consumption, online shopping alternatives, and weak daily consumption, resulting in continued pressure on rent and income quality. The report shows that the market has entered a structural repair phase dominated by asset quality and tenant mix. Rental prices for core street shops in Hong Kong's four main retail districts (Central, Causeway Bay, Tsim Sha Tsui, and Mong Kok) remained flat on a quarter-on-quarter basis in the second quarter of this year, reflecting that the market is digesting the increases seen in the first quarter and has not yet entered a new phase of rapid growth. During this period, overall rental prices for major shopping centers fell by 1.8% quarter-on-quarter; the New Territories saw the largest decline with a drop of 2.7%, while Kowloon and Hong Kong Island experienced declines of 2% and 0.5%, respectively. The consumption recovery in Hong Kong's retail market during the second quarter was uneven. Sales of jewelry, watches, and luxury gifts increased by 22.1% year-on-year, and durable goods rose by 13.8%. However, supermarket sales only increased by 0.9%, with some categories of fresh food remaining flat or experiencing declines, indicating that daily consumption demand is still weak. Shopping centers in non-core areas face structural challenges, with an estimated annual consumption outflow of approximately HK$55.7 billion due to residents shopping across the border; additionally, about 10.4 million Hong Kong residents left the territory each month on average since the beginning of the year, continually diverting local shopping center clientele and purchasing power. Even if some shopping centers maintain high occupancy rates, renewal rents and rental income per square foot still face downward pressure. Furthermore, starting this year, the market is expected to see around 8 million square feet of new retail floor space coming into operation, primarily located in new development areas and non-core areas. Future competition for projects will not only depend on attracting tenants but also on establishing a distinctive position, optimizing the tenant mix, and drawing consumers to visit specially. Tom Chok-hin, Director of Hong Kong Research and Consulting at FIRST PACIFIC Davis, stated that while the Hong Kong retail market is gradually improving, it is still in a phase of structural repair dominated by asset quality rather than a full rebound. Core locations have stabilized rents due to the return of tourists, luxury consumer spending, and demand for experiential retail; however, shopping centers in non-core areas still face competition from consumption outflows, online shopping alternatives, and new supply. In the future, landlords must focus more on project positioning, customer coverage, and the ability to convert spending to maintain sustainable rental income. Eric Chan, Senior Director of the Retail Division at FIRST PACIFIC Davis, noted that there has been an improvement in retail leasing demand, and the market is observing a continuous emergence of new needs from mainland brands, sports entertainment, healthy living, light dining, and immersive experiences. However, tenant site selection will be more prudent, with brands placing greater emphasis on whether the shopping center can generate actual foot traffic and sales conversions. For landlords, the flexible introduction of pop-up stores, lifestyle dining that is pet-friendly, and interactive experiential formats, along with adjusting the tenant mix to meet community consumption patterns, will be key to enhancing project competitiveness.