Under the individual visit scheme (IVS) introduced in July 2003, mainland Chinese visitor arrivals overshadowed domestic consumers as the most important driving force behind Hong Kong’s high street shop rentals. However, if we were to compare the periods before and after the mainland China Government’s anti-graft campaign in 4Q12, the impact of Chinese visitor arrivals on the rental market has moderated considerably (Figure 1). For instance, in 4Q09, a 9% y-o-y growth in Chinese visitor arrivals corresponded to a 15% y-o-y growth in high street shop rents. However, for the same pace of growth in 4Q13, rentals increased by just 1% y-o-y.

Figure 1: Recent growth in visitor arrivals leads to slower rental growth in high street shops
Source: Hong Kong Tourism Board, JLL

With inbound Chinese visitors narrowing their purchases of luxury goods, domestic consumers snapped back to become a more important contributor to high street shop rentals, as shown in Figure 2.

Figure 2: Influence of domestic consumption on high street shop rental
Source: Census and Statistics Department, JLL

The change in spending habits of Chinese visitors also coincided with a change in domestic consumption patterns. Macroeconomic theory suggests that private consumption is either autonomous or induced. While the former refers to spending on necessities, the latter refers to spending that depends on the consumer’s disposable income. The proportion of income spent on induced consumption is referred to as the marginal propensity to consume (MPC). When MPC declines, it implies weaker demand for discretionary items, which in turn, places downward pressure on high street shop rents, and vice-versa.

Using a Kalman filter, we can estimate Hong Kong’s MPC trend over time. From Figure 3, we can see that Hong Kong’s MPC decreased from 2000 to 2010, which means that more of the local population was saving a larger portion of their income. The increase in savings, and lower MPC, was likely a result of a weak economy between 2000-2003 and 2009 and potential homebuyers saving or allocating a greater share of their income for purchasing a home. The latter likely explains why the MPC fell against rising home sales from 2004-2008 even as housing prices began to also rise.

The stabilisation of the MPC from 2010 onwards has coincided with Government’s introduction of cooling measures for the housing market, which led to the sharp drop in home sales. One explanation for why the MPC has stopped its downward descent has been that the new cooling measures—which includes an array of demand suppression measures such as lower loan-to-value (LTV) ratios and additional stamp duty costs—along with surging housing prices has put home purchases beyond of the reach of many would-be-buyers. As a result, these potential homebuyers have increased their spending on discretionaries, as their hopes of getting on the housing ladder have faded.

Figure 3: Market cooling measures discourage home purchase, preventing the MPC from falling
Source: Census and Statistics Department, Land registry, JLL

Looking ahead, the weakened purchasing power of inbound visitors, especially those from mainland China, is likely to persist. Yet, this does not mean that the recovery in the inbound tourism market will not lend support to the local retail sector; only that the amount of spending we can expect from each individual visitor has diminished slightly. Coupled with an increase in induced consumption from the local population, we expect the recovery in retail sales and the local retail sector to sustain over the near-to-medium-term. The tables could turn quickly, however, if the economy runs into problems (trade war, anyone?) or the Government relaxes some of the cooling measures it has imposed on the housing market, which in both instances would subsequently discourage spending on discretionaries once again.

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