Market gathering pace

Events over the past year have confirmed our long-held view that Hong Kong's prime retail property sector is highly resilient. The global financial crisis, triggered by the burst of the property market bubble in the US, caused Hong Kong's Grade-A office rents to drop 41.3% and luxury residential rents to fall 32.9% in the recent downturn. However, during the same period, prime retail rents dropped only 11.4%. Even at the height of the crisis in the fourth quarter of 2008 and the first quarter of 2009, there were waiting lists for shops in Hong Kong's premium shopping malls like Harbour City in Tsim Sha Tsui, Festival Walk in Kowloon Tong and New Town Plaza in Sha Tin.

After falling 5.4% in the second half of 2008 and 6.3% in the first four months of 2009, prime retail rents began to recover in May this year, spurred by a global stock market rally, relatively stable Mainland visitor arrivals and better-than-expected local retail sales. So far, prime retail rents have rebounded about 10% since bottoming, while the rents of some prime street shops have already bounced back to levels last seen before the collapse of Lehman Brothers in September 2008.

After dropping 33.2% for eight months, the average price of prime street shops bottomed in February 2009, two months before the average retail rent reached its trough. Driven by the loose credit policy of commercial banks and investors' improved risk appetite, the average price of prime street shops has so far rebounded almost 30% since bottoming.

Investors were keen to acquire retail properties as commercial banks started to reopen credit taps in the second quarter of this year. The number of retail property transactions increased dramatically, from 429 in the first quarter to 1,317 in the second quarter. There was also reemergence of large-scale transactions worth over HK$100 million, rising from only two in the fourth quarter of 2008 to 14 in the second quarter of 2009. A considerable number of these buyers were from Mainland China.

Towards the end of the second quarter, almost all high-yielding shops had been snapped up and many prime shops in core retail areas had been absorbed, forcing buyers to expand their search to second-tier locations. With prices rising faster than rents, the average rental yield of retail property fell from 4.8% in November 2008 to 4.2% in July 2009. Some prime units were transacted at high prices, despite offering rental yields of as low as 2%, as buyers were eyeing higher potential rents upon the next lease renewal. With the practice of gazumping becoming prevalent and the gap between bidding and asking prices widening, transactions of retail properties began to drop in July.

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