Total retail sales contracted by 4.0% y-o-y in the first five months of 2025, driven by strong northbound and outbound travel, changing consumer spending patterns, weak domestic spending sentiment amidst widespread store closures and rising unemployment rate. Meanwhile, per capita tourist shopping and dining spending dropped 8.9% despite continuous inbound tourism revival.

Restaurant closures were a significant concern in the first half of the year. Total restaurant receipts declined by 0.6% y-o-y in 1Q25, following a 0.1% decrease in 2024. Looking at specific restaurant types, “non-Chinese restaurants”, “fast food shops” and “bars” saw positive receipt growths.

Figures from JLL show that the vacancy rate of High Street Shops in core shopping districts remained stable at 10.5% at the end of June. Conversely, vacancy rate of Prime Shopping Centres increased to another record high of 10.5% due to the new supply and increased vacated area in existing developments.

Notably, landlords have generally been more willing than before to effectively lower rents through methods such as extended rent-free periods this year. It attracted various industries to expand despite challenging market conditions. Leasing demand primarily came from light refreshments, gyms, sportswear, kids entertainment centres, and pharmacies. International luxury brands have recently begun to expand. Leasing activity continued to concentrate in core shopping districts.

New non-local retailers continued to enter Hong Kong, despite a 28% y-o-y drop in the first half of 2025 due to the high base of comparison from last year. About 72% of newcomers are F&B operators. Retailers from the Mainland are the most active group, accounting for 44% of the total newcomers, followed by Japan (24%) and South Korea (18%).

Jeannette Chan, Senior Director of Retail at JLL, said: "Leasing momentum in core shopping districts remains active. In response to the challenging market conditions as well as retailers’ cost-conscious sentiment, landlords, particularly those with High Street shops, are increasingly flexible on lease terms. They are offering longer rent-free periods for both new leases and renewals to attract and retain tenants. The ongoing rental correction and evolving leasing strategy present opportunities for retailers to secure more favourable terms and for international brands to establish a footprint in the Hong Kong market,"

"Moving forward into the second half of 2025, approximately 600,000 sq ft of new prime retail space is slated for completion, exerting upward pressure on Prime shopping centre vacancy rates. We expect retail rents of High Street Shops and Prime Shopping Centres to drop 5-10% this year," she added.

Hong Kong Prime Retail Indicator - % Change

Mixed signals have locked bulls and bears in a standoff in the housing market. Lower HIBOR, rising stock prices, and a reduction in stamp duty for properties valued between HKD 3 million and HKD 4 million have positively impacted the housing market. However, geopolitical uncertainties, record high negative equity levels over the past 22 years, developers' discounts exceeding 30%, and a looming commercial real estate crisis present significant headwinds.

Despite a slight recovery to about 20,000 secondary transactions in the first half of 2025, secondary market volume remains below the 2018-2024 average. This marginal improvement in sales volume is insufficient to justify a major price rebound, as previous rebounds were typically preceded by transaction volume gains of 50% or more.

The primary market has about 93,000 new homes available for sale by the end of March, with rising number of unsold units in completed projects. By the end of this year, it will take 56.7 months for the market to digest this inventory, higher than the average of 51.3 months between 2015 and 2021. Developers must continue price cuts, leading to a prolonged price correction. No sustainable recovery is expected until 2026, when inventory decreased to a healthy level.

On the other hand, encouraging macroeconomic indicators point to a potential moderation in the pace of price declines. As the amount of time deposits have doubled compared to 2021 levels, rising positive carry may redirect capital into the property market amid widening yield advantages. Meanwhile, population growth from talent visas (27,000 in Q1) is expected to initially boost rental demand before converting to home purchases.

Joseph Tsang, Chairman of JLL in Hong Kong, said: "In the coming six months, developers will need to continue offering discounts on new projects to ensure steady sales velocity. Persistent HIBOR levels below 2% may boost home sales upon market acceptance of this trend's longevity. Residential rents are projected to reach record highs, driven by sustained inflows of non-local talents and students. We expect prices of mass residential properties to drop by 5% this year. Since increasing listings of distressed commercial properties will affect the owners of luxury residential properties, we have revised our forecast on capital values of luxury residential properties from a fall of 5% to a decline of 5-10% this year."

Hong Kong Residential Indicator – % Change