Historically Low Construction Rates Drive Record Rents in Global Retail Markets.
Hong Kong is the world’s most expensive global retail market as wealthy Chinese tourists, luxury retailer expansion and a shortage of prime space drive rents to record highs, according to new research from global property advisor CBRE Group, Inc. (CBRE).
CBRE’s quarterly survey, which tracks the top 10 most expensive prime global retail markets, continued to find historically low construction rates of prime retail space, leading to low availability levels and fierce competition. This dynamic is driving record rents across many global retail markets, including those ranking among the most expensive, such as Hong Kong, London, Paris and Sydney.
Hong Kong is firmly established at the top of the rankings, with prime rents holding steady during the fourth quarter of 2012 (Q4 2012) at $4,335 per square foot per annum to defy a deceleration in retail sales due to current global economic uncertainty. Demand in Hong Kong has remained relatively muted as many retailers have grown less aggressive with their expansion or entry plans given the market’s lofty rent levels. Retailers throughout Hong Kong have generally become more selective in their requirements and, the best, prime units are still in high demand, while off-prime or secondary units attract less interest.
Joe Linn, Senior Director Retail, Hong Kong, CBRE, commented:
“Elevated prime retail rents in Hong Kong are not only caused by the influx of tourists and luxury brands, but also the serious lack of prime retail space in core retail districts. There are very few new malls in the pipeline and so international brands are competing for limited shop space. With relatively promising economic expectations for 2013, luxury brands will continue to see Hong Kong as a profitable opportunity; however, when the rents become prohibitive, retailers act carefully.
“The flipside to this is that local retailers, who are not primarily targeted at tourists, cannot afford the increasing rents and in some cases are forced to relocate, which is resulting in less choice in prime districts. With the prime areas packed with Chinese tourists, local residents are also beginning to shift to the outskirts of the city for their shopping. However, Chinese tourist spending was beginning to slow towards the end of last year and rents are not anticipated to rise dramatically in 2013 given their already high levels.
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Overall, CBRE’s prime retail rankings saw little change during Q4 2012. Prime rents have stabilised at historically elevated levels due to a scarcity of, and preference for, prime space in locations with the greatest degree of visibility. Tourism throughout Asia, Europe and the U.S. has principally supported the prevailing stability in prime rents.
Ray Torto, Global Chief Economist, CBRE, commented:
“The global retail market has stabilised, though retailers have tempered the aggressiveness of their expansion plans and become more strategic in opening stores. In the near term, prime rental growth is expected to stabilise in Hong Kong, Melbourne and Sydney, and even strengthen slightly in Tokyo, Paris, London and Beijing. Economic headwinds, such as pervasive consumer deleveraging, lacklustre employment growth in the U.S., and sovereign debt and policy response uncertainties in both the U.S. and Europe, have resulted in low construction rates across most markets, exacerbating space shortages and keeping or driving prime rents higher.
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As the only Americas city in CBRE’s top 10 rankings, New York has performed particularly well over the past year, driven by strong tourism trends and demand from international retailers. In contrast to extensive shortages for prime space seen in markets such as Hong Kong, Paris, London and Sydney, new supply in New York came online at an accelerated pace along Fifth Avenue. The new supply is being marketed at all-time record high rents; as a result, the overall asking rent on Fifth Avenue rose 16.5% year-over-year to a record high of $2970 per sq. ft. per annum.
While most global prime rents were stable during Q4 2012, London and Paris both witnessed measurable prime rent growth - with 10% and 27% quarter-over-quarter growth, respectively - due to persistent demand from international retailers. Paris, in particular, climbed four positions in the rankings relative to Q3 2012. Even with quarterly growth of 27%, Paris is expected to see further prime rent growth due to increasing demand for space in the city’s best locations. Throughout Europe’s top retail locations - Paris, Moscow and London in particular - there was a divergence in performance between primary and secondary locations, as the latter continues to experience falling rents and rising vacancies.
The supply of prime space was tight elsewhere throughout the Asia Pacific region, which helped maintain rent levels in Sydney, Melbourne, Beijing and Tokyo. In Sydney, demand from international retailers (especially from the US) is high with many new will brands set to enter the market in 2013.
