City&Country: Offshore-- HK as shopper’s paradise under threat as rents rise

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Hong Kong’s high-street retail rents have never been cheap and this has been especially true in the past few months, during which rents have risen steadily higher.
And though landlords have been very aggressive in raising prices, there has been no shortage of retailers (mainly luxury or international retail giants) bidding for the same location.
By aggressive, we are not talking about raising rents by 30% or 50% when leases fall due for renewal after two to three years of tenancy, but 80% or 100% — and sometimes even 120%. Indeed, increases at the upper end of these ranges have become commonplace, especially in prime retail districts.
We therefore forecast that retail rents in prime districts will see a y-o-y increase of around 10% in 2011, while rentals in some prime streets could increase by 15% to 20%.
Prime retail districts in the city are limited to Causeway Bay, Tsim Sha Tsui and Mong Kok, and since there are only four or five prime retail streets in these districts, supply is limited. Demand for space on the other hand — particularly from retailers of jewellery and watches, cosmetics and electronic products — has been booming, driven mainly by the increasing numbers of mainland shoppers coming to Hong Kong.
The result has been a sharp rise in prime retail rents, which has forced retailers serving the less profitable non-mainland market to relocate to secondary streets or shopping centres.
Over the decade from 1990 to 2000, it was still possible to find some Hong Kong-style tea restaurants, wonton noodle restaurants, gift shops and local fashion boutiques with shopfronts in Canton Road (opposite the Harbour City main entrance), for instance.
But the street is now almost entirely occupied by luxury watch shops and upmarket international fashion brands — the only retailers that can justify rents that have risen almost sevenfold from around HK$150 psf to over HK$1,000 psf in the past five or six years. It is not rocket science. While rents have risen sevenfold, a bowl of wonton noodles now costs HK$25 to HK$30 against HK$12-15 in 1995, just two times more!
In Queen’s Road Central, much the same has happened. The opening of H&M’s flagship store in the area in 2006 marked a turning point in the retail mix and saw a wave of international fashion brands setting up shop in the district. As a result, rents have been driven up from around HK$300 psf in 2005 to almost HK$1,500 psf currently.
The same pattern has unfolded in Russell Street, Sai Yeung Choi Street, Yun Ping Road and Haiphong Road, leaving limited merchandise choices in prime districts and shops that are not in high demand by local residents.
In recent years, most new shopping centres that have opened in Hong Kong are medium to small scale (with gross floor area ranging from 250,000 to 450,000 sq ft), vertical malls with a relatively small footprint providing limited ground floor shopping space that is taken up by international brands.
Food and beverage or other lifestyle retailers are generally located in lower-rent upper floors of such vertical malls, while international fashion brands such as jewellers and cosmetics traders take up the more expensive lower floor spaces. That means the retail space suitable for international fashion brands has become limited (approximately 10% of the mall’s GFA on the ground floor and first floor).
But many fashion labels that are looking to enter the mainland as well as Hong Kong are looking for locations offering up to 20,000 to 30,000 sq ft with prominent street exposure — and such spaces are few and far between in Hong Kong.
Strong demand and limited supply has resulted in ever-increasing rents. The talk is that some brands have had to alter their expansion strategy in Hong Kong by opening only one or two large-scale flagship stores in key locations, instead of a larger number of outlets in all the prime centres.
Some have even decided to skip the Hong Kong market altogether and enter directly into the mainland or other Asian cities such as Singapore, Kuala Lumpur or Taipei. As a result, Hong Kong may be in danger of losing out to rival markets.
Meanwhile, many local chain stores are being forced out of prime locations as they become victims of the current trends. They are left to relocate to secondary streets or malls offering lower customer traffic, or move to upper levels of vertical shopping centres, or smaller outlets in department stores. There is no doubt high rentals and limited shop space have been making it increasingly difficult for such local chains to run their businesses.
For medium- to small-scale retailers whose cash flows are weaker than chain stores, the situation is even worse. Most now find it very difficult to open a new shop in Hong Kong and have to relocate to second-tier locations or pay more in order to secure smaller shop premises.
It would seem clear that if there is no significant change to this business environment in the next five years, the Hong Kong retail market will soon see prime streets dominated by retailers of jewellery, watches and cosmetics that are patronised mainly by mainland shoppers, and many vertical malls following the same model, with fashion and cosmetics on lower zones, restaurants and cinemas on upper zones, and a limited number of new overseas brands.
It will also see a few local chain stores in retail districts or shopping malls that offer a wider choice to local shoppers, including casual apparel, shoes or other basic necessities.
And if this trend is not arrested, Hong Kong’s reputation as a shopper’s paradise will disappear. — SCMP

This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 846, Feb 21-27, 2011