Hong Kong retailers being offered cheaper rents and shorter leases, even for prime sites
On both sides of the harbour, the price of floor space is tumbling, as visitor numbers dwindle and losses rack up
Hong Kong’s retail property market is now experiencing some of weirdest phenomena of recent times, as landlords of ground-level shops not only slash rents significantly, but also offer extremely short tenancy periods, even in prime locations.
The trend comes at a time when the battered retail sector, which heavily relies on tourism spending, is showing few signs of recovery.
“During the market boom, such arrangements would have been out of the question as most prime spaces were normally snapped up quickly, and achieved high rents,” said Michael Chik, managing director of agency Sheraton Valuers, which focuses on retail shop transactions.
Retail leases are normally renewed every three years, he said.
“It is rare to see major retail chains go for a short term, as they usually spend a lot on decoration and take time to recover their costs,” said Chik, adding that the more-flexible lease conditions underline just how cautious the market outlook remains, for both retailers and landlords.
Chik said some short-term leases for street-level units are being signed for 50 per cent less than longer-term contracts.
“For landlords, it is better than leaving their shops empty,” he said.
UBS is forecasting luxury retail rents, meanwhile, could tumble 20 per cent between now and 2017, and larger spaces for mass retailers could drop 10 per cent in rent during the same period.
Cosmetic chain Colourmix just renewed its 1,500 square feet street-level shop at Hanley Building in Tsim Sha Tsui for another three months at a monthly rent of HK$500,000, about 17 per cent lower than its previous three-month leases.
Colourmix took up its first three-month agreement in March for HK$600,000 a month, about 67 per cent less than the HK$1.5 million a month paid by the former tenant, Emperor Watch and Jewellery.
Similar examples of three-month leases, falling in rent, are being extended to foreign brand in Causeway Bay, too.
Korean high-end optical store Gentle Monster has just opened its first flagship store — The Platform — in Hysan Development’s 1,800 square feet retail shop at 25 Lan Fong Road, Causeway Bay.
The optical shop, decorated to look like a train at a platform, is aimed at attracting fashionable, young-minded, trendy, gadget-loving buyers.
Industry watchers say the lease is for one year, but the site had been offered since last year for even shorter leases.
Hysan refused to comment on what lease had been signed there, of offer any other details on individual leases. But in a written reply to the Post, it did reveal the shop has been leased to several different tenants recently, as pop-up stores.
These included cosmetic retailer Kiehl’s Natural Lab, fast-fashion chain Uniqlo’s 10th anniversary DIY workshop, sportswear Nike’s Nike iD Air Max store, Columbia’s online pop-up outlet, and the newly opened Gentle Monster flagship store.
“While the pop-up stores have been successful, for a space like this one we take a flexible approach when it comes to the length of lease, and we still see this as a longer-lease store,” said Hysan’s director of retail, Kitty Choy.
She described the shop as in prime strategic location, right between Hysan Place and the Lee Gardens retail hub, adding the pop-up store space at 25 Lan Fong Road also “serves another useful purpose”.
“A majority of those who opened a shop there, also have stores in other parts of our portfolio.
“The ability to showcase their special products in a site that usually sees very healthy footfall is obviously a good way to further enhance tenant/Hysan partnerships,” she said.
Hong Kong’s retail industry is currently being hit by dwindling footfalls and weakened domestic consumption, amid what remains a bleak economic outlook.
Government statistics showed May retail sales decreased 8.4 per cent on a yearly basis after an April decline narrowed to 7.5 per cent from a 9.8 per cent dip in March, marking the 15th consecutive month of contraction.
The May sales result, was mirrored by an overall drop, too, in visitor numbers to Hong Kong, which dipped 6.4 per cent compared with May 2015, a noticeable fall from a 2.1 per cent decline in April.
Mainland visitor figures fell 8.3 per cent in May, a retreat from a 4.0 per cent decrease the month earlier. The number of mainland overnight visitors fell 6.3 per cent in May after recording its only uptick this year in April.
Some local retailers have already said they plan to reduce their number of stores in tourist belts, after reporting profit declines or trading losses.
Cosmetic giant Sa Sa International has just reported its profit tumbled 54 per cent to HK$383 million for the year to March this year, while Emperor Watch and Jewellery lost HK$120 million last year.
The two chains said they would be focusing on opening new outlets in residential areas instead, to better cater for local customers.
“Retailers are walking cautiously, step by step, as the industry remains clouded by a dim economic outlook,” said Chik.
Tom Gaffney, CBRE’s managing director for Hong Kong, Macau and Taiwan, said that while plenty of retailers are downscaling in Hong Kong, there are also examples of retailers expanding.
“The market is simply undergoing a transformation — gradually shifting from one kind of demand driver to another,” he said.
“This will take time and the process will see the market self-adjusting, including rental levels and lease structure.”