MarketView Hong Kong Retail

CBRE

MarketView Hong Kong Retail www.cbre.com/research

First Quarter 2012

Quick Stats

OVERVIEW

Unemployment rate* 3.4% Median household income

HK$ 20,800

Inflation rate

4.7%

Visitor arrivals

3.37 million

Retail sales value

HK$33.8 billion

Prime retail rental value

HK$584 psf

*Mar 2012, 3 month average figure

Hot Topics • Tourist-driven activities continue to support leasing demand in the Hong Kong retail market • Prime rents are likely to continue their upward trend amid tight supply and strong demand, albeit at a slower rate • Landlords are actively reshuffling tenants to make way for high-end brands

• Leasing demand underpinned by tourist-driven activities Encouraged by the continued strong spending from mainland visitors, retailers with tourist-driven activities continue to seek a greater presence in key shopping districts. The most competitive retailers in securing space come from the cosmetics, luxury brands and jewelry sectors. sectors • Slower rental growth Landlords are generally holding firm with high asking rents given the tight supply of prime retail space. Average prime high street retail rents continued to trend upwards in Q1, but at a slower rate to that recorded through 2011. While rents in all sub-markets registered an increase, Causeway Bay recorded the highest rental growth, thanks to the ongoing expansion demand from cosmetics vendors and watch retailers. • Revised tenant-mix to cater for more luxury brands Recognizing the potential high rental value of prime high street retail space, landlords are actively reshuffling their tenant-mix to cater for more high-end luxury brands. Retail space, particularly with eye-catching shop fronts in prime locations, are heavily sought after by luxury retailers. As such, landlords are responding actively by relocating the non-luxury retail tenants from ground or lower floors to higher stacks. • Outlook The sustained demand from international brands for prime retail space is likely to continue to support prime retail rents over upcoming months. We expect to see prime retail rents to continue their upward trend, albeit at a softer pace of growth compared to 2011. There are signs that some mid-range retailers are unwilling to pay high rents, and despite strong demand from luxury retailers, this could impact further on rental growth prospects going forward.

Total Retail Sales in Hong Kong 60

40% Total Retail Sales (3 Month Average) Retail sales 3 Month Average Year-on-Year Year Change (%)

50

30%

40

20%

30

10%

20

0%

10

-10%

0

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-20%

Source: Census & Statistics Department

© 2011, © 2012 CB Richard CBRE HKEllis, Limited Inc.

Year-on-Year Change

Trend

HK$ Billion

Latest data (Feb)

Retail sales values climbed 16% y-o-y to reach HK$33.8 billion during Feb 2012. Jewellery, watches and valuable gifts accounted for just over a fifth of all sales. Strong retail sales of luxury and big-ticket items was reflected in ongoing solid demand for prime space in the core shopping districts. For instance, Prince Watch expanded its existing Peking Road outlet from 2,000 sf to a 3-storey flagship store with over 13,000 sf. It also increased its exposure by leasing another ground-floor shop at Haiphong Road in Tsim Sha Tsui. Meanwhile, Chow Tai Fook, a local jewellery chain, also leased the ground floor in Lockhart Road to expand its retail network. International retailers were also active in leasing retail space. International fashion brands Massimo Dutti and Y-3, each leased 2 floors in Loke Yew Building and Wellington Street respectively in Central; while Swatch preleased a street-level shop at Sai Yeung Choi Street South in Mong Kok during the quarter. Looking at retailer demand from F&B operators, Chee Kee, a Michelin starred restaurant, committed to lease a prime location at Connaught Road Central to replace the previous KFC shop. The new shop, with more than 8,000 sf will be the largest amongst its five branches in Hong Kong and marks the first entry of a renowned traditional quality Chinese eatery along Connaught Road Central, an area more associated with fast food outlets. It is also indicative of how some retailers are exploring new locations due to high rents in core areas. This could encourage more quality establishments to consider the area, should space become available.

5

400% Number of Visitors (Million) Year-on-Year Change (%)

4

300%

3

200%

2

100%

1

0%

0

Year-on-Year Change

The Hong Kong retail market remained positive and demonstrated a relatively resistant performance against global uncertainties over the quarter. Growth in tourist arrivals in 2012 through to February remained strong to register an increase of 15% y-o-y, y, with over 70% coming from mainland China. On the domestic front, latest figures show that private consumption expenditure in Q4 2011 rose 11% y-o-y, y, buoyed by improved average monthly household income.

Number of Visitors (Million)

MarketView Hong Kong Retail

Visitor Arrivals to Hong Kong

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-100%

Source: Hong Kong Tourism Board

Mainland Tourist Spending vs Total Tourist Spending 250 All Other Countries Tourist Spending Mainland China Tourist Spending

200

150

100

50

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Hong Kong Tourism Board

Mainland Tourist Arrivals vs China M2 60%

30%

40%

25%

20%

20%

0%

15%

Mainland tourist arrivals (Year-on-Year growth)

China M2 (Year-on-Year growth)

10%

Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12

-20%

Source: Hong Kong Tourism Board, The People’s Bank of China

Q1 2012

Page 2 © 2012 CBRE HK Limited

Buoyed by strong leasing demand from luxury retailers, overall prime retail rents increased 1.9% q-oq, or 14.3% y-o-y, to average $584 psf in Q1 2012. However, this is down considerably on q-o-q growth of 9 9.9% for Q1 2011. Amongst all sub-districts, Causeway Bay recorded the highest rental increase at 2 2.7% q-o-q to average $653 psf. Thuis growth was largely due to the expansion of cosmetic and watch retailers such as Sa Sa and Swatch Group along Russell Street and Percival Street.

10% 8% 6% 4% 2% 0% -2% -4% Feb-12

Feb-11

Feb-10

Feb-09

Feb-08

Feb-07

Feb-06

Feb-05

Feb-04

Feb-03

Feb-02

-6%

Source: Census & Statistics Department

Overall Prime Retail Rental Index vs Retail Sales 40%

Overall Prime Retail Rental Index… Retail Sales Year-on-Year Change (%)

30% 20% 10% 0%

Riding on the upward trend in rents and tight supply of prime retail spaces across the market, landlords are generally holding firm with high asking rents. Given the potential high rental value in core shopping areas, some landlords are actively reshuffling their tenant-mix in order to make way for luxury brands. For instance, Wharf will relocate the UA cinema at Times Square from G/F – 2/F to space which is currently occupied by Food Forum on 12-13/F. The space that the cinema occupied on will be split into three retail shops - one with 3,800 sf on G/F, and two 9,000 sf shops on 2/F. Luxury retailers are likely to occupy space in these three shops. This relocation project is expected to be completed in 1H 2013. In addition, California Fitness at Hang Lung’s One Grand Tower in Mong Kok moved from G-1/F to 4-5/F. The vacant space previously occupied by the fitness center is also likely to attract leasing interests from higher-end retailers or watch and jewellery shops.

MarketView Hong Kong Retail

Hong Kong Inflation Rate

Q1 12

Q1 11

Q1 10

Q1 09

Q1 08

Q1 07

Q1 06

Q1 05

Q1 04

Q1 02

-20%

Q1 03

-10%

Source: Census & Statistics Department, CBRE Research

Looking ahead, leasing momentum in the retail market is expected to remain positive over the coming months given sustained retailer demand and limited supply of prime retail space, particularly units with large floor plates and exposure to substantial foottraffic traffic.

Prime Retail Rental Indices by Districts 300

Central Tsim Sha Tsui

250

We expect to see the upward trend in rents to continue over the coming months, although the rate of growth will be significantly down on 2011 levels. There are signs that some retailers are unwilling to pay high rents, and despite strong demand from luxury retailers, this could impact further on rental growth prospects going forward.

Causeway Bay Mong Kok

Index (Q1 1996=100)

200 150 100

Q1 12

Q1 11

Q1 10

Q1 09

Q1 08

Q1 07

Q1 06

Q1 05

Q1 04

Q1 03

0

Q1 02

50

Page 3 © 2012 CBRE HK Limited

Q1 2012

Q4 2010

Source: CBRE Research

Selected leasing transactions in Q1 2012 Size (sf) (Gross)

Tenant

District

Property

Unit/Floor

Massimo Dutti

Central

Loke Yew Building

G/F, 1/F

8,676

Chee Kee

Central

Chinese Club Building

B/F, G/F, 1/F

8,514

Y-3

Central

56-58 Wellington Street

G/F, M/F

2,000

Aigle

Central

Tak Shing House

Shop 1, G/F

780*

Chow Tai Fook

Causeway Bay

531-533 Lockhart Road

G/F

2,000

Swatch Group

Causeway Bay

Lai Yuen Apartments

G/F

750

Kowloon Watch

Causeway Bay

2 Cannon Street

Shop E, G/F

400

Prince Watch

Tsim Sha Tsui

Bo Yip Building

Shop 3, G/F & whole of 1/F, 2/F

Aimer

Tsim Sha Tsui

Parklane Shopper’s Boulevard Site D

Shop G29, G30, G/F & shop 15, 1/F

The Body Shop

Tsim Sha Tsui

Haiphong Mansion

Shop 6A, G/F

600

Prince Watch

Tsim Sha Tsui

Paramanda House

Shop A, G/F

460

Swatch

Mong Kok

62 Sai Yeung Choi Street South

G/F

Prime Shopping Districts in Hong Kong

13,096 2,644

600 *Note: net floor area

Tsuen Wan Line

Island Line

Kwun Tong Line

Airport Express

Tseung Kwun O Line

Central This traditional banking and financial centre of Hong Kong is also a popular shopping hub for shoppers from mediummedium to high-income groups. Strategically linked with the Airport Railway and MTR, and supported by a number of Grade A office buildings, 5-star 5 hotels and prestigious shopping centres in the area, Central has a large catchment area and attracts a broad spectrum of shoppers including includ tourists, expatriates, office workers, singles and families. Causeway Bay This area attracts a broad mix of international tourists, local shoppers, including office workers from commercial buildings within the area, young shoppers and family shoppers. The area has a comprehensive mix of retailers and restaurateurs catering to young, rich, budget minded and family clientele. Tsim Sha Tsui This area has the largest concentration of hotels and attracts tourists, affluent young shoppers predominantly from Kowloon, and office workers from commercial buildings within the area. There is a wide array of retailers ranging from necessity to luxury goods, restaurants, tailors and entertainment venues such as discos and karaoke bars. Mong Kok Strategically located along both MTR and KCR lines, Mong Kok also attracts a wide spectrum of shoppers, mainly local residents resident and Chinese tourists. The area consists of a number of modern fashion and accessories boutique stores catering to the young and hip h crowd. © 2012 CBRE HK Limited. We obtained the information above from sources we believe to be reliable. However, we have not verified its accuracy and make no guarantee, warranty or representation about it. It is submitted subject to the possibility of errors, omissions, change of price, rental or other conditions, prior sale, lease or financing, or withdrawal without notice. We include projections, opinions, assumptions or estimates for example only, and they may not represent current or future performance of the property. You and your tax and legal advisors should conduct your own investigation of the property and transaction.

For more information regarding the MarketView, please contact: CBRE Research: Edward Farrelly T: (852) 2820 2886 E: [email protected] Retail Services: Joe Lin T: (852) 2820 2860 E: [email protected]

CBRE Hong Kong Office 4/F Three Exchange Square 8 Connaught Place Central, Hong Kong T: (852) 2820 2800 F: (852) 2810 0830 Kowloon Office Suites 1201-3 & 14, 12/F, Tower 6 The Gateway, 9 Canton Road, Tsimshatsui Kowloon, Hong Kong T: (852) 2820 8100 F: (852) 2521 9517