Landlords in Hong Kong’s priciest retail strips are facing a wake-up call: the days of leasing stores for $1 million a month are over.
Rents in three of the city’s prime shopping areas are near the lowest in more than a decade and owners are offering discounts of close to 80% from the peak about eight years ago in Hong Kong’s Russell Street, according to data from Cushman & Wakefield Plc. The strip in Causeway Bay on Hong Kong Island was ranked as the world’s most expensive for shop rentals until 2019, the last time that the firm released global numbers.
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It’s a sharp reversal of fortune for the well-to-do families and individual investors behind Hong Kong’s retail meccas, who in better times could count on mainland tourists to splash money on upmarket handbags, watches and cosmetics. Now shops that used to sell Swiss watches offer budget mobile phone gadgets after the 2019 anti-government demonstrations and some of the world’s strictest Covid-19 travel restrictions deterred China’s affluent travelers.
“Imagine that you have a shop in a core district like Central, you wouldn’t want to lease it to a company that sells face masks,” said Kenneth Yau, senior district sales director at property agency Midland IC&I Ltd., adding that there are few alternatives now with lackluster luxury retail sales. “They have to accept the current environment.”
Tsim Sha Tsui on the Kowloon peninsula, Causeway Bay and Central were three of the top 10 most expensive high streets in Asia in 2020, according to Cushman & Wakefield, which didn’t release a global report for that year due to the pandemic.
Prime shopping areas have been in chronic decline since late 2013, with pandemic-related travel restrictions dealing the latest blow. Rents at Causeway Bay’s premium shops fell by half in the third quarter from two years ago at the height of the protests, according to Cushman & Wakefield’s data.
Chow Tai Fook Jewellery Group Ltd. rented a shop in Central for HK$500,000 ($64,200) a month, 50% lower than the previous tenant, Hong Kong Economic Times reported last week.
Earlier this year, a shop in Russell Street — once a popular destination for wealthy mainland tourists — was leased for about HK$100,000 a month to a phone gadget store. The shop is now leased to an affordable women’s clothing store with a higher rent of HK$300,000 a month, said Robert Ma, whose family owns the space.
“I don’t think the rents will rebound quickly, but they may rise gradually,” said Ma, a director at Koon Wing Motors Ltd., the largest minibus operator in Hong Kong. “It depends on the opening of the borders, especially for core districts like Russell Street and Tsim Sha Tsui.”
Prada closed a store on Russell Street last year, for which the monthly rent topped $1 million, the Hong Kong Economic Journal reported at the time. Switzerland’s Swatch Group AG accelerated plans to shut stores permanently in Hong Kong as Chinese luxury spending returned to the mainland.
Landlords with premium retail space used to demand high rents and reputable brands as tenants, according to Cynthia Ng, executive director for retail services at Colliers International. The persistent downturn in the market has now forced landlords to adjust, she said.
While rental income drastically declined in recent years, owners can still make money given the low purchase prices in prior decades, according to Yau.
Hong Kong became a destination of choice after Chinese tourists were allowed to enter the city as individual travelers as opposed to being in group tours in 2003. Their penchant for luxury goods boosted the city’s retail industry — and store rents shot up.
But the double whammy of the pro-democracy protests in 2019 and the pandemic took a toll on Hong Kong’s tourism and retail industry.
Now the city is in talks with Chinese officials about potentially reopening their shared border. Limited cross-border travel could resume as soon as the end of the year or in the first quarter of 2022, Legislative Council member Michael Tien said in an interview this week. Hong Kong has one of the world’s strictest Covid-19 policies with quarantines of up to 21 days.
Even without the political upheavals and the pandemic, Hong Kong faces increasing challenges from mainland cities. The rapid development of the domestic luxury industry in China has diminished Hong Kong’s role as mainland residents’ shopping mecca. That’s why Ma predicts retail rents will never go back to their peak.
“There are more places in other parts of China that have developed well, like Hengqin in Zhuhai,” Ma said. “Hong Kong is just one of their options now.”