Hong Kong retail sales slowed but the trend did not deteriorate, while office rents rose for the third consecutive quarter

Overview

This report tracks Hong Kong's May retail sales and JLL's 2Q26 commercial real estate data. The core conclusion is that headline retail sales growth slowed from 9% in April to 8% in May, but underlying momentum was more stable after excluding unusually volatile categories such as automobiles and electrical appliances. Meanwhile, the Hong Kong office market recovery continued, with rents and capital values improving more clearly in Central and surrounding areas. In retail real estate, stabilized sales have not yet driven a return to positive overall rents, and prime retail rents continued to decline quarter-on-quarter.

Core views

First, the “slowdown” in May retail sales needs to be assessed in detail: overall year-on-year growth of 8% remains within the 5-10% positive-growth range, and the gap versus the historical average narrowed. Second, staples retail sales grew 4% year-on-year and are expected to maintain mid-single-digit growth over the coming months, although cross-border e-commerce platforms such as Pinduoduo remain a structural challenge. Third, discretionary consumption growth slowed from 14% in April to 12% in May, but accelerated from 8% in April to 13% in May excluding automobiles and electrical appliances. Fourth, the office recovery is clearer than the retail property recovery: Central rents rose 3.3% quarter-on-quarter, and overall Grade A office capital values recorded quarter-on-quarter growth for the first time since 2Q22. Fifth, at the equity level, the report has a stronger preference for Hongkong Land and Swire Properties, which benefit from the office recovery, and prefers Link REIT over Wharf REIC among retail landlords.

Analysis framework

The report cross-validates macro retail sales, category-level sales, visitor arrivals, cross-border e-commerce penetration, and JLL commercial property rental and capital value data. The analysis focuses not only on headline year-on-year growth, but also on excluding unusually volatile categories, comparing with the 2015-18 average, separating staples and discretionary consumption, and observing rental pass-through and submarket differences to assess the true pace of Hong Kong commercial real estate recovery.

Methodology notes

• Retail sales decompositionComparison of headline growth with growth excluding abnormal categories

  Observe core retail momentum excluding automobiles and electrical appliances

  The report believes automobile and electrical appliance growth was exceptionally strong in recent months, and the May slowdown depressed headline growth; excluding these two categories, both overall and discretionary consumption sales showed acceleration.

• Historical benchmark comparisonRelative to the 2015-18 average

  Use a pre-pandemic normalized benchmark to measure the extent of recovery

  Overall May retail sales were 11% below the 2015-18 average, an improvement from the 15% gap in April; the discretionary consumption gap also improved from -27% in April to -24% in May.

• Commercial property operating dataJLL 2Q26 office and retail data

  Assess the property cycle using rents, capital values, and yields

  Office rents rose for the third consecutive quarter, and capital values turned positive quarter-on-quarter for the first time since 2Q22; retail rents continued to decline, indicating that the pass-through from improved retail sales to rents remains delayed.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Hongkong Land

  Beneficiary of the office recovery

  Strengths

  Rising office rents in Central and surrounding areas and improving capital values should support valuation recovery for core office assets.

  Weaknesses

  Overall Grade A office rents remain 37% below the 2019 peak, and the recovery has not fully returned to historical highs.

  Comparison

  Compared with retail landlords, office landlords are currently benefiting from clearer improvements in rents and capital values.

  Risks

  The recovery could weaken if financial-sector leasing demand slows or peripheral submarkets continue to deteriorate.

• Swire Properties (1972.HK)

  Beneficiary of the office recovery

  Strengths

  Benefits from improving office leasing demand in core and surrounding areas; the report identifies it as one of the key beneficiaries of the office recovery.

  Weaknesses

  Retail rents remain under pressure, and retail-related assets in the portfolio may face delayed pass-through.

  Comparison

  Along with Hongkong Land, it is one of the primary office recovery beneficiaries mentioned in the report.

  Risks

  If improved retail sales do not translate into a return to positive rents, overall commercial property valuation recovery may be constrained.

• Link REIT (0823.HK)

  Preferred retail landlord

  Strengths

  Shopping mall spot rents are stabilizing, its 6.8% dividend yield is attractive, unit buybacks began in July, and August operating data may improve.

  Weaknesses

  Hong Kong's overall retail rents have not yet turned positive, and the pass-through from improved sales to rents still requires time.

  Comparison

  The report prefers Link REIT among retail landlords, while maintaining a Neutral view on Wharf REIC.

  Risks

  Continued cross-border e-commerce penetration, slower visitor growth, and further retail rent declines could weigh on tenant sales and rental recovery.

• Wharf REIC (1997.HK)

  Retail landlord

  Strengths

  May benefit from stabilized Hong Kong retail sales and a recovery in high-end consumption categories.

  Weaknesses

  Prime retail rents still fell 1.4% quarter-on-quarter in 2Q26, and an overall return to positive rents has not yet occurred.

  Comparison

  Compared with Link REIT, the report maintains a Neutral view on Wharf REIC.

  Risks

  Slower visitor growth, continued retail rent declines, and an uneven recovery in high-end retail.

• PDD HOLDINGS INC

  Structural competitive factor from cross-border e-commerce

  Strengths

  Pinduoduo is mentioned in charts related to Hong Kong monthly active users and cross-border e-commerce penetration, reflecting the impact of non-local e-commerce platforms on consumer channels.

  Weaknesses

  This is not a company research report on PDD and provides no rating, target price, or financial forecasts for the company.

  Comparison

  PDD is an external competitive variable for retail and shopping mall tenant sales, rather than a primary investment subject of this report.

  Risks

  Further increases in cross-border e-commerce penetration could weigh on local physical retail and retail property rental recovery.

Key data

• Hong Kong May retail sales+8% Y/YSlightly down from +9% Y/Y in April.
• May retail sales relative to the 2015-18 average-11%Improved from -15% in April.
• Overall retail sales excluding automobiles and electrical appliancesMay +8% Y/Y, April +6% Y/YShows acceleration after excluding abnormal categories.
• Staples retail+4% Y/YApril was +5% Y/Y; expected to maintain mid-single-digit growth over the coming months.
• Discretionary retail+12% Y/YApril was +14% Y/Y; excluding automobiles and electrical appliances, May was +13% Y/Y.
• Jewelry and valuable gifts+26% Y/YOne of the strongest-performing retail categories in May.
• June visitor arrivals+7% Y/YDown from +9% Y/Y in May.
• Hong Kong Grade A office rents+1.7% Q/Q, HK$48 psfThird consecutive quarter of growth, still 37% below the 2019 peak.
• Central office rents+3.3% Q/QLed all submarkets, driven by leasing demand from the financial sector.
• Hong Kong office capital values+0.8% Q/QFirst quarter-on-quarter increase since 2Q22.
• Prime retail rents-1.4% Q/Q, HK$88 psfThe decline widened slightly from -1.3% in 1Q26.
• Link REIT dividend yield6.8%One of the reasons cited in the report for preferring Link REIT.

Impact & implications

From an investment perspective, the office recovery is the clearer positive signal, with improving rents in Central and surrounding areas benefiting Hongkong Land and Swire Properties. Although retail sales growth is stable, overall retail rents have not yet turned positive, so pass-through to retail landlords is slower; Link REIT is more attractive due to stabilizing shopping mall spot rents, a 6.8% dividend yield, unit buybacks beginning in July, and potentially improving August operating data, while Wharf REIC remains Neutral.

Risks

• Visitor growth slowed from 9% in May to 7% in June, which could weaken subsequent retail sales momentum.
• With a higher base in 2H, maintaining 5-10% year-on-year retail sales growth over the coming months may become more difficult.
• Cross-border e-commerce platforms such as Pinduoduo continue to pose a structural challenge to Hong Kong staples consumption and physical retail.
• Improved retail sales have not translated into positive overall retail rent growth, creating a risk of delayed or ineffective rental pass-through.
• The office recovery is concentrated in Central, while Kowloon East and HK East continue to see rent declines; submarket divergence may persist.
• J.P. Morgan has disclosures relating to market-making, clients, investment banking business, or potential compensation involving the relevant companies; investors should monitor the conflict-of-interest disclosures.

What to watch

• Whether Hong Kong retail sales can maintain 5-10% year-on-year growth over the coming months.
• Whether core retail momentum continues to improve after abnormal categories such as automobiles and electrical appliances normalize.
• Whether visitor growth slows further and the impact on jewelry, department stores, and discretionary consumption.
• Whether Link REIT's 1QFY27 tenant sales and August operating data confirm stabilizing shopping mall rents.
• Whether rising Central office rents spread to areas beyond Wan Chai/Causeway Bay and Tsim Sha Tsui.
• When prime retail rents will stop declining quarter-on-quarter and turn to positive rental adjustments.