Hong Kong planners must cater to noodle shops amid unsavoury rent rises

My friends know I am a noodle foodie. Everywhere I go throughout Asia, I try the noodles, from laksa in Penang, pad thai in Bangkok, beef pho in Hanoi, mohinga in Yangon; each bowl showcases the culture and flavour of the place, through the texture, spices and taste. Somehow, I remember a place by the quality of its noodles.

There is nothing quite like the great wonton and noodle shops in Hong Kong. They are not fancy places, but have been in the same location for ages - beloved local institutions with lifetime customers.

But, in the past few months, several historic noodle shops and cafes have closed due to rising rents. In the days before the closure of the 42-year-old Lei Yuen Congee Noodles in Causeway Bay, in January, hundreds of tourists and residents flocked to the shop, waiting in hour-long queues at lunch time for a last chance to eat there.

Rising rent is nothing new in Hong Kong, which competes with Tokyo as one of the world's most expensive real estate markets. Yet Tokyo is full of small ramen and sushi shops that have been around for decades - brought to international attention recently by the film Jiro Dreams of Sushi, about a dedicated Michelin-star sushi shop in the Tokyo subway.

Tokyo sushi shops also have to pay the high rents, but perhaps their landlords realise Japanese culture would be poorer without them.

It is part of the economic cycle that rent will increase in line with inflation and supply and demand. But property prices in Hong Kong are both a function of location as well as interest rates, which are now at their lowest for decades. Thus, low interest rates and the US dollar peg means real estate prices and rents will rise faster in a faster-growing Hong Kong than in the US.

The 91-year-old owner of the recently shuttered Kam Kee Café in Shau Kei Wan only retired after 45 years because his rent jumped from HK$20,000 to HK$50,000 a month, not because he was tired of serving milk tea. If he had owned his shop, at HK$50,000 a month, he might as well retire on the rental income and let someone else take all the business risks.

Hong Kong hasn't had rent control laws on the books since 1998, but neither does Tokyo. Hong Kong is, instead, an extreme example of the sociological effect of what can happen to small and medium-sized enterprises when rent inflation occurs in a situation of low land supply response. The free market view is that, if location is good and rents are rising, the shop must convert to higher value-added products. So wonton shops may change to selling sushi or become bars that can charge higher prices.

Hollywood Road is famous as the Chinese antique centre of the world, but now the antique shops are being replaced by bars and pubs. Some have moved into cyberspace, but the Hollywood Road brand may become lost because tourists can't find as many antique shops as before.

In economics, the inestimable social value of an old café is called a "positive externality", because its social value to the community lies beyond its rental value. The inability of the real estate market to take this external value into account is a market failure.

Even town planners realise that the shopping experience has to cater for a range of tastes, from the poor to the rich, for the real estate to be sustainable long-term. It is the diversity that makes a place vibrant.

The growing retail business model of "clicks versus bricks" is that you need only a few premium stores, like Apple in prime locations, and the rest will be bought on the web. The small wonton or sushi shop simply cannot have the scale to do that. So young entrepreneurs will be driven out of business by high rents and start-ups will become much more expensive to fund.

We are witnessing Schumpeterian "creative destruction" in action. In the US, the rise of online seller Amazon not only signalled the demise of small bookshops, it also brought down large store chains that could not compete.

So what is the right business model for small businesses in the age of massive social and technological change? Individually, the noodle shop is a price taker, not a price maker like a famous brand. They have no influence on their rents, or their selling price. If they get driven out of business, there is not just an inflationary effect, but social choice will decline as diversity is lost. You get only fast food instead.

This is a classic collective action trap as no individual player can change the game on their own. Markets are moving faster than town planning and land supply rules can change.

Planners across Asia in cities such as Mumbai, Jakarta and Kuala Lumpur will have to provide retail space at affordable prices for the new wave of migrant entrepreneurs selling bakso noodles or nasi lemak for the masses that keep prices down.

Not to do so would only increase the social divide between the haves and have-nots. Markets change, and land use rules and regulations must change with the times.

Andrew Sheng is president of the Fung Global Institute