Hong Kong retail rents starting to look oversold

Hong Kong has a well-earned reputation as Asia’s shopping capital and the continent’s most vibrant real estate market, but there are creeping anxieties that mainland China’s flagging economy could impact on the territory’s fortunes.

There are no signs of a slowdown when it comes to retail rents.

In recent weeks, the McDonald’s restaurant on Russell Street, the most expensive shopping street in Hong Kong, was forced to close after its rent trebled to HK$1.58 million (€154,000) a month.

The South China Morning Post newspaper ran a story harking back to when the US chain opened its first Hong Kong outlet – just around the corner from Russell Street, in Paterson Street, back in 1975.

The rent back then was HK$64,500 (€6,280) per month on a 3,000 sq ft ground-floor space next to the Japanese department store Matsuzakaya, which is less than a small apartment in Mid-Levels would set you back now.

The newspaper quoted an estimate by Joe Lin, senior director of retail services at property consultant CBRE, which reckoned a similar space today in the Hang Lung Centre would cost as much as HK$3 million (€292,000) per month, or the equivalent of 156,250 Big Macs.

The McDonald’s on Russell Street is being taken over by the cosmetics chain Sa Sa, which will pay will pay HK$263 (€25.61) per square foot in rent on the 6,000sq ft space.

The Sa Sa chain sells cut-price cosmetics and is a huge hit with mainland Chinese shoppers. During a visit to a Sa Sa last week, the scented air was full of the Mandarin Chinese spoken by northern Chinese, with only the merest whiff of Cantonese, the dialect of Chinese spoken in Hong Kong.

All of the salespeople were able to speak fluent Mandarin, much more so than English.

While it is normal for fast-food businesses to be pushed out by high-end retailers who want to snap up top locations, it is “quite unhealthy in Hong Kong that the rental growth rate in prime retail streets is largely determined by the consumption pattern of mainland Chinese tourists, as Hong Kong residents don’t play any role here,” Mr Lin told the paper.

"No other cities in the world are like Hong Kong, where the high-street retail rent is affected by the consumption pattern or the number of tourists from a single country."

Annual decline
Yearly rental costs are much higher in Hong Kong than in New York, and more than four times higher than in London, according to CBRE Research.

Still, the broader expectations are for retail rents to post their first annual decline since 2008 this year, as mainland Chinese shoppers spend less on luxury fashion and goods.

Prime street retail rents in Causeway Bay, home to the world's most expensive shopping precinct, are expected to fall 4 per cent in 2013, Michelle Woo, Hong Kong-based executive director for retail at Cushman & Wakefield, told a briefing.

Retail rents in the central business district are expected to fall 3.5 per cent, she said.

The Hang Seng property index of landlords and developers has fallen sharply in the last quarter.

Mainland China’s economy grew 7.5 per cent in the second quarter from a year earlier, slowing for a second straight period, and there is also a government clampdown on spending on luxury goods by officials.

There are plenty of fears about a property slump. Residential mortgage debt accounts for around 46 per cent of Hong Kong GDP.

Despite the gloom and the slowdown on the mainland, for the time being at least, Hong Kong’s retail sector is proving robust.

Total retail sales value rose 14.7 per cent year-on-year in June to HK$39.9 billion (€3.89 billion), as tourism continues and local consumers keep shopping.

For the first half of 2013, total retail sales climbed 15 per cent in value and 14.4 per cent in volume over the same period a year earlier.

But there were declines in some areas. The sales volume of motor vehicles and parts fell 14.8 per cent, followed by sales of electrical goods and photographic equipment, down 11.8 per cent, furniture and fixtures down 3.6 per cent, and food, alcohol and tobacco 2.8 per cent.