Despite headwinds, retail and leisure occupiers in Hong Kong still bank on bricks and mortar

A sentiment survey conducted by Savills reveals that despite the majority of respondents believing 2025 will be another challenging year for the retail and leisure industry, bricks and mortar remains a popular option for businesses striving for growth. 

Largely driven by a resurgence in tourism after Hong Kong reopened its borders to the world, the market witnessed a period of recovery in 2023, with total retail sales showing a year-on-year increase of 16%. Encouraging sales figures have spread a sense of optimism across the market, motivating occupiers to plan for expansion in 2024.

However, 2024 is proving to be a challenging year for Hong Kong’s retail and leisure industry as the excitement of finally leaving Covid’s shadow has faded. Facing numerous headwinds, including outbound consumption, elevated interest rates, declining consumer optimism, and a slowing Chinese economy, the industry’s mood has clearly deteriorated. With US-China relations remaining uncertain, it’s unsurprising that the majority of respondents found it hard to be optimistic about their outlook for 2025.

That said, 56% of respondents answered “Yes” when asked whether they have plans to expand their physical store footprint next year.

Why is that?

Rebased Rents

Even before the pandemic, there had been a gradual decline in the occupancy costs of Hong Kong’s prime streets. In contrast, rents at Prime shopping malls continued to grow until 2019.

Fast forward to 2024: rents for both Prime Streets and Prime shopping malls are now down 76% and 47% from their respective peaks. Lower occupancy costs enable opportunistic occupiers to upsize at proven locations or relocate to superior locations on both Prime Streets and in Prime shopping malls that were previously unavailable or out of budget. Spanish retailer Mango, for example, took the opportunity to secure a 19,000 sq. ft flagship location on Queen’s Road Central with a rent reported to be 60% below peak levels. 

“Trending brands such as ON, Hoka, and Salomon have been able to take advantage of the rebasing rents to enter the Hong Kong market over the past year. However, if shopping mall owners want to attract new international brands to their retail lineup, rents will need to be further reduced to remain competitive with malls in the region.” –  Philip Lam, Associate Director, Retail

Return to In-Person Shopping

It is well reported that consumers worldwide are showing a growing preference for in-person experiences. Modern shoppers are seeking the “experiential”—to see, touch, hear, smell, and interact with other people, including vendors.

Physical spaces allow businesses to better engage with their customers by providing a platform for a more immersive shopping experience through physical interactions, which in turn fosters brand loyalty and ultimately increases sales.

Compared to other major cities worldwide, online shopping has traditionally had a smaller impact on the retail market in Hong Kong. While e-commerce accounts for nearly 28% of retail sales in China and 15.6% in the US, e-commerce only accounts for 8% of total retail sales in Hong Kong. In-person shopping remains deeply embedded in the city’s culture as one of Hong Kong’s favourite pastimes, highlighting the importance of having physical points of sale in the Special Administrative Region.

Local Demand

Hong Kong domestic shoppers are among the most affluent in the world. According to The Henley’s 2024 World’s Wealthiest Cities Report, Hong Kong ranks 9th globally, boasting more than 143,000 millionaires—ahead of other major Chinese cities such as Beijing and Shanghai, which rank 10th and 11th, respectively.

Visa recently revealed that Hong Kong travelers spent an average of over HK$1,800 (US$230) per day while in Paris, recording the highest share of daily spending across APAC during the recent Paris Olympic Games. The city’s strong domestic purchasing power, now aided by the implementation of the government’s Top Talent Pass Scheme, which has brought more than 130,000 talents to Hong Kong, is likely to have influenced the decisions of some of luxury retail’s biggest names to commit to expanding at the Landmark and K11 Musea in the coming four years, underscoring Hong Kong’s appeal for retailers.

Rates Cut

The Federal Open Market Committee announced on 18th September that it will lower its key overnight borrowing rate by 50 basis points, marking an aggressive start to its first easing campaign in four years. This demonstrates that the Fed has shifted its focus away from inflation and toward growth, with interest rates expected to favor the economic outlook.

Being pegged to the dollar, Hong Kong’s retail spending will likely benefit from a weaker dollar, which favors inbound shoppers. A lower global rate environment would also likely release liquidity back into the capital market in Hong Kong, supporting equity and real estate market valuations, two of the city’s most important wealth indicators and thus improving consumer sentiment.

“With the recent easing of the interest rates in the US and China we expect to see an improvement in market sentiment in Hong Kong in 2025 which should translate to more store openings in the year.” – Nick Bradstreet, Director, Head of Asia Pacific Retail