REBOUNDING TOURIST NUMBERS BOOSTING RETAIL AND HOSPITALITY DEMAND

It was four full months since border reopened, and Hong Kong has welcomed 7.3 million visitors (5.7 million from Mainland) over the period, representing around 30% of pre-COVID levels. After a ‘disappointing’ Easter Holidays when departing Hongkongers (1.58 million from April 4 to April 8) significantly outnumbered incoming Mainland tourists (270,000 over the same period), and many retail and F&B outlets  reported declining sales over the period, the Labour Day Golden Week fared better, with 630,000 Mainland tourists coming to town over the 5-day festive period, around 50% of 2019 levels over the same period. Luxury retailers were the main beneficiaries with most reporting sales reaching 70% to 80% pre-COVID levels, while some even fully recovered 2019 Labour Day Golden Week sales. Some F&B operators also welcomed waves of Mainland tourists, given they were traceable on Xiaohongshu. Nevertheless, other retail sectors were mostly muted as Mainland tourists spent rest of their time touring around rather than shopping.

HIGH COST OF FUNDS DAMPENING INVESTMENT SENTIMENT

US Fed as expected raised interest rates by 0.25 percentage point in early May, and all banks in Hong Kong followed suit with a 0.125 percentage point increment, raising prime rate to 5.75% to 6%. This was also the first time US Fed signaled a potential end, or at least a pause, to the current rate hike. Nevertheless, even if this signal becomes reality, according to previous rate hike cycles, interest rates may still remain at current high levels for at least another year, and the high cost of funds (around 5.5% to 6.5% for most commercial loans) would remain a major stumbling block to commercial real estate investments for the rest of the year.

En-bloc / major investment transactions therefore declined heavily in Q1/2023, with only HK$7 billion worth of transactions over the period. PERE funds, which were active in such market over the past five years with market share ranging from 30% to 60%, were hardly seen in the market as even 4% to 5% on offer with some current asset sales were difficult for them to underwrite given high cost of funds. Under such circumstances, the investment market was vastly muted over the past two months, with Uni-China Group purchasing the retail podiums of One Kai Tak (I) (II) (29,732 sq ft) for HK$650 million being the only significant investment deal, and the 5.2% passing yield on offer reflected the cautious attitude of professional investors in this new high interest rate era, even with retail prospects the most promising among all sectors.