Foreign funds chase retail assets in housing estates as they offer better value compared to prime streets

Sandy Li
·3-min read

Overseas institutional investors are focusing on acquiring retail properties in Hong Kong’s major housing estates, as they expect businesses catering to local communities to stay resilient compared to the uncertain outlook for retailers in the tourist belts, according to property consultants.

“Smart money from the US and Middle Eastern sovereign wealth funds are seriously looking for shops in major housing estates after seeing annual investment yield increase to a 10-year high of 3 to 4 per cent from the previous 1 to 2 per cent,” said Oscar Chan, head of capital markets at JLL in Hong Kong.

Shop prices and rents could rebound 5 to 10 per cent this year after dropping 70 per cent from a peak level in 2014, he added.

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Many international brands, largely dependent on tourists, have closed or slowed their expansion in prime retail areas like Central, Causeway Bay and Tsim Sha Tsui. Visitor numbers to Hong Kong plunged 94 per cent to 3.57 million in 2020, with the outlook for tourism still hazy as the pandemic rages on.

Chan said he has observed an increasing number of local and institutional investors eyeing shops in major housing estates such as Tseung Kwan O, Yuen Long and Tin Shui Wai.

“It will be hard to buy any shops if they wait for retail sales to return to normal. Then, prices will shoot up,” Chan said. “Neighbourhood retail sales will rebound first once the vaccination to contain the Covid-19 pandemic takes effect,” he added.

The occupants of such retail spaces are supermarkets, banks, convenience stores and property agents whose businesses have been unaffected in the past year.

“Retail shops in catchment areas of large housing estates could be an interesting investment opportunity,” said Robert Scholten, head of real estate finance for Asia-Pacific at ING Bank.

However, he believes that at least in the first half of this year Hong Kong’s retail market in general would continue to be less attractive for investors.

Hong Kong landlords adjust rent expectations as pandemic reshapes retail landscape

Investors have channelled more than HK$38.5 billion (US$4.96 billion) into ­acquiring neighbourhood malls since 2017.

Most of the investments was by a consortium comprising Hong Kong private equity fund Gaw Capital Partners, Goldman Sachs, China Great Wall Asset Management and Blackstone, which bought 29 retail neighbourhood malls for HK$35 billion from Link Asset Management in two separate deals in 2017 and 2018.

In 2018, a consoritum led by Hong Kong-based Phoenix Property Investors bought three malls in Tseung Kwan O from Wheelock for HK$3.38 billion. And in May 2019, US private equity fund KKR invested HK$180 million for a 50 per cent stake in the retail podium at the Lake Silver residential complex in Ma On Shan, owned by Wang On Group.

Gaw said that retail businesses at its community malls were holding up well.

A general view of Russell Street in Causeway Bay, once the world’s most expensive shopping street. Photo: Sun Yeung
A general view of Russell Street in Causeway Bay, once the world’s most expensive shopping street. Photo: Sun Yeung

“Hongkongers will probably stay in town during Chinese New Year, [and] they tend to spend more on non-discretionary products which our malls are focusing on” Gaw said in a statement. “Nevertheless, a combination of factors, like the unemployment rate, economic uncertainty and social distancing measures, etc, are making the recovery signs less visible for now.”

“More institutional investors are expressing an interest in neighbourhood retail podium or shopping malls as it provides stable and sustainable rental growth,” said Reeves Yan, executive director and head of capital markets at CBRE Hong Kong.

But the opposite is true for prime retail properties. “Investors are still cautious on high street shops as they rely heavily on tourist spending,” Yan said.

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