Hong Kong | Market Insights | Retail May 2015

The boom times go “Boom” for Hong Kong retail Introduction On 13th April 2015, the Chinese government announced that it would cap visits by Shenzhen permanent residents to Hong Kong, a change that took effect immediately. The Ministry of Public Security said it will stop issuing unlimited multiple-entry visas to Shenzhen residents, who will now only be able to enter Hong Kong once per week, and stay for no longer than seven days. In this paper, we study how these changes will impact Hong Kong’s retail sales and retail rents. The restriction on visits by Shenzhen residents comes on top of structural changes stemming from the mainland’s anti-corruption campaign, a shift in consumption patterns by mainlanders, and a trend of declining tourist arrivals from the mainland into Hong Kong. Mainland shoppers find Japan and South Korea increasingly attractive as a result of their depreciating currencies. We conclude that the hiccups in the retail market are primarily caused by those structural changes, not the restriction on multiple entries.

Section 1: Parallel-trading restrictions to hit headcount but not Hong Kong retail sales A tough time for Hong Kong residents in the territory’s north

Calculating the hit to overall retail sales from the visitor cap

Aiming to crack down on parallel traders, who buy products in Hong Kong to resell at a profit across the border, Chinese authorities have limited Shenzhen’s permanent residents to just one visit a week to Hong Kong using their multipleentry permits. Previously, Shenzhen residents were allowed unlimited visits to Hong Kong with that form of permit. Mainlanders swarmed into shopping malls in Hong Kong’s northernmost towns such as Tuen Mun, Sheung Shui and Fanling, buying necessities, provoking complaints from residents near the border about the lack of goods on the shelves. This is due to the enormous demand by mainland Chinese for food, in particular milk powder, which shoppers see as being both cheaper and better-quality in Hong Kong. Household goods from Hong Kong are also highly prized items.

Despite the Chinese government’s crackdown on parallel trading – particularly mainlanders who take advantage of Hong Kong’s lower taxes – we predict that the impact on the overall retail sales performance in Hong Kong will be limited.

The restriction could slash visitor arrivals by 4.6 million per year The multiple-entry scheme was introduced in April 2009, drawing 1.4 million visitors from April to December that year. The figure rose to 4.1 million in 2010, and climbed to 14.9 million in 2014. The Hong Kong government says the restriction on that category of visitors could slash the number of arrivals by 4.6 million per year, or 31%.

The total expenditure of same-day mainland-tourist arrivals accounted for 5.3% of Hong Kong’s total retail sales in 2008, before the implementation of the multiple-entry scheme in April 2009. In 2013, visitor spending by that particular type of tourists accounted for 12% of the total. The cap on visits seriously hampers the operational capability of mainland traders. But what does that mean for Hong Kong retail sales as a whole? Let us assume we are reverting back to the days without the multiple-entry scheme, when sameday mainland tourist expenditure contributed 5.3% of total retail sales. Assuming no growth in overnight mainland-visitor spending and 6% growth in local spending, retail sales will only suffer a single-digit decline of 4.8% in 2015.

Chinese authorities have limited Shenzhen’s permanent residents to just one visit a week to Hong Kong using their multiple-entry permits

Calculating the hit to overall retail sales from the visitor cap SAME-DAY MAINLAND TOURIST EXPENDITURE

5.3%

S TOTAL SALE

OVERNIGHT MAINLAND-VISITOR SPENDING

0%TH

GROW

C LO

AL

S

PEN

Assumption Reverting back to the days without the multiple-entry scheme

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The boom times go “Boom” for Hong Kong | May 2015 | Colliers International

DIN

6%

GROWTH

G 2015 re

ta

il s

ale

s

2015

4DE.8CL%INE

Section 2: Structural changes the real weight dragging retail sales down

The surge in Chinese tourists heading farther afield could be a game changer

Mainland Chinese Visitors Received by Markets in 2014 50.0

100%

40.0

80%

30.0

60%

20.0

40%

10.0

20%

0.0

Yera-on-Year Change

No. of Visitor Arrivals (Million)

Hong Kong’s retail sector is under pressure from the mainland’s austerity and anti-corruption campaign, which has dented luxury spending. There is also increased competition from Europe, South Korea and Japan, which are attracting more Chinese tourists, leading to fewer tourist arrivals from the mainland into Hong Kong. Those destinations are cheaper now that their currencies have weakened substantially against the Chinese yuan and the U.S. dollar, and therefore against the Hong Kong dollar as well. Coupled with changing spending patterns by visitors, it all leads to a knock-on effect on the retail market and a decline in retail sales.

Hong Kong

Macau

Korea

Taiwan

Japan

Vietnam

Singapore

-10.0

-20%

-20.0

-40% Mainland Chinese Visitors Arrivals

The strength of the U.S. dollar, to which the Hong Kong dollar is pegged, erodes the city’s competitiveness. Nowadays, affluent mainland Chinese customers increasingly travel to other countries to shop rather than coming to Hong Kong for occasional shopping trips. Hong Kong was their destination of choice in the first few years after the individual-visitor scheme launched in 2003. In 2014, the growth rate of mainland Chinese tourist arrivals to North Asia skyrocketed. Mainland visitors to Japan rose an astonishing 83% year-on-year, with visits to Korea up 42% to Korea and 39% to Taiwan.

0%

Year-on-Year Change

Source: CEIC

J A PA N

83% KOREA

42%

Chinese Tourist Arrivals

TA I WA N

39%

Mainland Chinese shoppers go to Japan for its cultural depth and sophistication

HONG KONG

MACAU

KOREA

TAIWAN

JAPAN

VIETNAM

SINGAPORE

Mainland Chinese Tourist Arrivals in 2014 (millions)

47.2

21.3

6.1

4.0

2.4

1.9

1.7

Year-on-Year Change

16%

14%

42%

39%

83%

2%

-24%

Source: CEIC

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The boom times go “Boom” for Hong Kong | May 2015 | Colliers International

Why are the Chinese visiting? Due to the weakness of the yen, shopping in Japan looks cheap to the middle and upperclass Chinese consumer. The Japanese government has done its part by relaxing visa restrictions and extending sales-tax exemptions. The Chinese consumer is increasingly looking for quality and views Japanese products in high regard. What’s more, they are not just looking to shop anymore – they are also looking for the whole cultural and shopping experience. What are they buying? Home appliances such as rice cookers top many shopping lists. Cosmetics and electronics are hot items as the authenticity of the items can be ensured. What’s more, infant items that are made in Japan are a big seller due to a spate of baby-product safety scares in China over the last few years.

Growth Rate of Mainland Chinese Visitors North Asia 100% 80% 60%

Year-on-Year Change

Let’s take Japan as an example. A record number of mainland Chinese tourists visited Japan in 2014, the total almost doubling to reach 2.4 million. That figure represented 18% of the total tourist arrivals in Japan for the year.

40% 20% 0%

2010

2011

2012

2013

2014

-20% -40% Japan

Korea

Source: CEIC

Growth Rate of Mainland Chinese Visitors Hong Kong, Macau and Taiwan 80% 70%

Year-on-Year Change

60% 50% 40% 30% 20% 10% 0%

2010

2011

2012

2013

Macau

Hong Kong

2014

Taiwan

Source: CEIC

Mainlanders go to Korea for up-and-coming trends and pop culture fascination Growth Rate of Mainland Chinese Visitors Southeast Asia 80%

Year-on-Year Change

60% 40% 20% 0%

2010

2011

2012

2013

-20% -40% Vietnam

....to Taiwan to rediscover Chinese cultural roots

4

Source: CEIC

The boom times go “Boom” for Hong Kong | May 2015 | Colliers International

Singapore

2014

Has Hong Kong’s retail sector become too dependent on mainland Chinese spenders? Mainland-visitor spending accounts for a significant portion of Hong Kong’s total retail sales. The proportion of mainlandtourist expenditure grew from 19% of total sales in 2008 to 36% in the first half of 2014. However, spending from mainland tourists has decelerated, and mainland tourists are also staying for shorter periods in Hong Kong.

Hong Kong Retail Sales by Shoppers’ Category $600

Retail Sales Value (HK$ billion)

$500

Annual retail sales felt the pinch for the first time since the outbreak of SARS in 2003, declining 0.2% in 2014. They dropped mainly due to lower sales of luxury products and some durable items as tourists flashed less cash. Tourist appetite for jewellery, watches and other luxury items appears to be waning, as reflected in the 13.7% drop in sales of luxury goods. That was followed by an 8.1% drop in sales of electrical goods and photographic equipment, which fall under the category of durable goods.

What will happen if spending by overnight mainland visitors falls 10%? That’s something of a perfect storm, with less-exuberant consumption from the mainland visitors who choose to come to Hong Kong, and well-heeled tourists heading to other destinations.

$400 $300 $200 $100 $0

Tourist appetite for luxury items is waning

2008

2009 Locals

Other Visitors

2010

2011

Mainland Overnight Visitors

2012

2013

Mainland Same-day Visitors

Source: Census and Statistics Department; Hong Kong Tourism Board

We retain our assumption that the abolishment of multi-entry trips from Shenzhen will cause same-day mainland tourist expenditure to revert to the 5.3% level of total retail sales seen in 2008. But what happens if the effect is more intense, and the market experiences a 10% drop in spending by overnight mainland visitors? Given our forecast of 6% growth in local spending, we predict that Hong Kong retail sales would decrease by 7.2% in 2015. If there is a precipitous decline in spending – let’s say, a 20% drop in overnight mainland visitor spending –we forecast that Hong Kong retail sales would drop 10%.

Hong Kong Total Retail Sales First Half of 2014 Locals

Other Visitors

HK$150.5 billion

HK$9.6 billion

4% Same-day Mainland Visitors HK$33.0 billion

Overnight Mainland Visitors

13%

60%

23%

HK$56.5 billion

Source: Census and Statistics Department; Hong Kong Tourism Board

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The boom times go “Boom” for Hong Kong | May 2015 | Colliers International

The headwinds hampering Hong Kong’s retail sales stem from structural changes in mainland-consumer behaviour. The mainland visitors that do come to Hong Kong are less willing to engage in conspicuous consumption. The growth in mainland visitors is not as vibrant as it once was because Chinese tourists are taking advantage of the depreciating currencies of other destinations. Chinese visitors to Japan reached a record level, up 88% in 2014, with Korea’s 42% annual growth and the 39% growth in visitors to Taiwan also remarkable. If these trends continue, they will continue to cast long shadows across the Hong Kong retail sector.

These are the key factors dragging retail sales down. If overnight mainland visitor spending decrease by 10%, Hong Kong retail sales will drop 7.2% in 2015, leading to a 10% drop in overall retail rents during the year.

Hong Kong Retail Rental Index 200

Forecast

180 160 140 120 100 80 60 40 20 0

Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

Despite the government’s move to crack down on parallel trading, we anticipate that the newly installed restrictions on multiple visits by Shenzhen permanent citizens to Hong Kong and the expected cutback in cross-border traffic as a result will have limited effect on Hong Kong’s retail-sales performance. Our most likely scenario assumes no growth in spending by overnight mainland visitors and 6% organic growth in local spending. That would cause retail sales to fall only 4.8% in 2015.

Index (1999 = 100)

Conclusion

Other factors include the slowdown in China’s economic growth, a change in shopping patterns, and declining appetite for luxury items have already hurt sales of many high-ticket items. This will also result in weaker retail-sales growth.

Source: Rating and Valuation Department

Calculating the hit to overall retail sales if spending by overnight mainland visitor falls 10%

SAME-DAY MAINLAND TOURIST EXPENDITURE

OVERNIGHT MAINLAND-VISITOR SPENDING

10%INE

5.3%

S TOTAL SALE

L

DECL

A OC

LS

PEN

DIN

6%

GROWTH

G 2015 re

Assumption Reverting back to the days without the multiple-entry scheme

re

ta

ta

il s

il R

ale

EN

s

TS

2015

7DE.2CL%INE

2015

% 10 DECL IN E

The surge in Chinese tourists heading farther afield could be a game changer HONG KONG

MACAU

KOREA

TAIWAN

JAPAN

VIETNAM

SINGAPORE

Mainland Chinese Tourist Arrivals in 2014 (millions)

47.2

21.3

6.1

4.0

2.4

1.9

1.7

Year-on-Year Change

16%

14%

42%

39%

83%

2%

-24%

Source: CEIC

6

The boom times go “Boom” for Hong Kong | May 2015 | Colliers International

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For further information, please contact: Helen Mak Senior Director | Retail Services | Hong Kong +852 2822 0779 [email protected] Individual Licence : E-087455

Simon Lo Executive Director | Research & Advisory | Asia +852 2822 0511 [email protected] Joanne Lee Senior Manager | Research & Advisory +852 2822 0557 [email protected] Arthur Yim Manager | Research & Advisory +852 2822 0510 [email protected]

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