Retail property occupiers have been proactive in the leasing market, while sellers hold firm to their asking prices

Now that the border between the People’s Republic of China and the Hong Kong Special Administration Region is fully open, the tourism industry is recovering. Among those benefitting are moneychangers.

One such business, the “mosquito-sized shop” A2, on the corner of Cannon Street and Lockhart Road in Causeway Bay, has been rented for a long time. In 2014 it took the title of the most expensive shop in the world per square foot, which it only lost during the pandemic. The 26 sq. ft. space’s unit price stood at HK$10,000. This year, the tenant renewed their lease for two years, with a monthly rent of HK$78,000, bringing its saleable unit rate to around HK$3,000, roughly 70% off its peak.

A2, as its name suggests, is part of a divided shop, with A1 also being mosquito-type, owned by the same investor. The shop has been leased by money changers since 2007, and seven years later, it was commanding a monthly rent of HK$260,000.

The retail market subsequently declined; in 2017, A2’s rent dropped to HK$138,000. Last year, when the pandemic continued to rage, the owner offered a "short-term rental" of HK$50,000 per month for one year. The contract expired recently.

On the other hand, based on the latest monthly rent, A2’s price has rebounded 56% from its low.?

In February 2023, Shop A1, with a saleable area of about 33 square feet, was leased to snack shop S’machi mochi at a monthly rent of HK$52,000 for a unit rent of HK$1,575. The shop, which sells handmade mochi ice cream, signed the lease from 13 February 2023 to 21 February 2025 – two years. This tenant initially rented this shop on a short-term lease from November 2022 to February this year.

The shop sells each mochi for HK$34, so they must sell around 1,530 monthly to make the rent. According to the Midlands agency, from March 2022 until October 2022, A1’s asking monthly rent was about HK$35,000. The current monthly rent is up by 49%. Two months later, A2’s rent had risen almost twofold off A1’s increase, proving how much operators value location, high pedestrian flow and double frontage.?

April’s retail property sales market weakened, recording only about 63 transactions, with a combined value of approximately HK$1.252 billion. The lack of transactions was caused by the HIBOR interest rate increasing rapidly from 4.15% to 4.61% in April, making acquisition costs higher. The recent good retail sales numbers have significantly boosted retail property sellers’ confidence. Owners are holding firm on their asking prices, even though investors are cautious.

From January to April, approximately HK$4.796 billion changed hands in 346 transactions of medium and small shops. Even though sales volume was down 13.3% from the same period in 2022, value only dipped 1.9%, meaning the average value of each shop sale was 13.1% higher than 2022’s.

The rental market performed well, with 548 leasing transactions recorded in March. With the open borders, tourism and economic activities have resumed, boosting the retail sector. Many operators are looking for suitable premises to launch their business dreams.

I predicted retail rent would increase faster in prime locations for Food and Beverage use, and property prices would follow. However, local banks raised their prime rates by 0.125%, and HIBOR interest climbed to 5.64% on 12 May 2023. The interest rate hike prompts investors to seek small to medium shops with lower prices. Once the interest rate stabilises at a reasonable level, we will see transactions pick up in volume and size.