Midmarket retail brands are set to take over luxury brands as the main driver of retail real estate demand in Hong Kong, ushering in a “structural change” for the market, according to a new report from consultancy CBRE.
Hong Kong’s retail market, which saw robust growth in years past on strong tourist inflows from Mainland China, has fallen on tougher times of late. Retail sales slid 0.2 percent in 2014 and 1.8 percent in the January to July period, CBRE said. The luxury sector has been hit particularly hard, thanks to China’s crackdown on corruption and a slowdown in China’s macroeconomic growth. Chinese travelers’ newfound tendency to bypass Hong Kong in favor other destinations like Europe or Japan has further eroded retail sales in Hong Kong. As reported, brands are feeling a squeeze from declining sales and ever-higher retail rents.
“Some operators which have been hit particularly hard have reduced their store footprint by not renewing leases, while others have opted to surrender their spaces well ahead of expiry. The main driver of demand for retail space has now shifted from high-end consumer goods to midmarket brands, a trend which has major implications for retail market shareholders,” CBRE said in its report entitled “The Changing Retail Landscape: How to Survive the Slowdown in Hong Kong?”
While consumers in Hong Kong have cut back on luxury spending, tourist demand for midmarket products has been stable over the years, “due to it providing a currency advantage, a wide range of products and reputation for selling genuine goods,” CBRE said.
Joe Lin, executive director of retail services for CBRE Hong Kong, said the down-market shift will have significant implications for the retail landscape.
“Over the past decade, high-street shop landlords have reaped the benefits of strong demand from luxury retailers and massive rental growth. Landlords must now be more realistic on rental negotiations, as luxury retailers are adjusting their leasing strategies to save costs, and more midrange brands are looking to tap into prime locations at relatively affordable rental levels. This opens the door for midmarket brands to expand,” he said.
CBRE also said it expects traditional luxury labels to introduce more secondary lines at accessible price points “to tap into growing demand for mid-market products from young consumers.”