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UBS: Hong Kong malls to see fewer luxury shops

Pedestrians walk past shuttered luxury shops in the Central district in Hong Kong on Oct 5, 2019. (PHOTO / AFP)

HONG KONG – Fewer luxury shops are expected to be seen in Hong Kong's shopping malls over the next five years, according to UBS Hong Kong.

Mainland consumers used to love to come to Hong Kong to buy luxury goods because of the greater variety of luxury brands and lower prices. However, because of the pandemic and compulsory quarantine measures implemented by the government, the market share of luxury goods has fallen sharply the last two years as fewer mainland consumers have visited Hong Kong, according to John Lam, UBS’ head of Hong Kong and Chinese mainland research.

John Lam, UBS’ head of Hong Kong and Chinese mainland research, said Hong Kong's luxury retail sector is expected to recover slightly after resuming quarantine-free cross-border travel, but it will not recover to the levels seen in 2018 or the first half of 2019 because of the expanding mainland luxury market

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Meanwhile, Hainan’s share of domestic luxury-goods spending had risen to 2 percent at the end of 2020, up from only 1 percent in 2019. The maximum personal duty-free allowance for Hainan's outlying-island visitors was raised from 100,000 yuan (US$15,650) from 30,000 yuan on July 1, resulting in a greater number of mainland tourists visiting and shopping there, and this adversely affected the Hong Kong market, Lam added.

The luxury consumer market during the pandemic started to flow back to the Chinese mainland in 2020, with luxury consumption from overseas being expected to fall to 36 percent in the next five years from 68 percent in 2019, while domestic luxury sales are expected to surge to 55 percent by the end of 2025 from 31 percent, according to UBS’s research.

Luxury companies have increased their shop openings in the mainland by 10 percent since the pandemic, mainly concentrating on second-tier cities and the Guangdong-Hong Kong-Macao Greater Bay Area, as they anticipate that some of their luxury consumption business will remain on the mainland permanently even after the end of mandatory quarantine measures.

Lam said Hong Kong's luxury retail sector is expected to recover slightly after resuming quarantine-free cross-border travel, but it will not recover to the levels seen in 2018 or the first half of 2019 because of the expanding mainland luxury market.

Regarding the expectation of the effect of the upcoming Hong Kong government vouchers, Lam said he believes the program will not offer much help with reviving the luxury goods industry in Hong Kong, as local luxury goods were mainly purchased by mainland visitors in the past, and as luxury goods are expensive, Hong Kong people will be more inclined to spend the vouchers on household items.

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UBS also estimates that more domestic real estate companies will increase the development of the shopping mall business because of the low gross margin of residential properties. In addition, the combination of transportation and property will become the new development mode of urbanization in the next five years. About 700 transit-oriented development (TOD) projects are expected to be carried out in the mainland by the end of 2025.

The requirements of TOD projects are very strict, as not all metro stations can be applied to TOD projects. Half of the developers’ assets should be held properties, reflecting the high capital requirements of TOD projects, Lam added.