The boom times for landlords of prime retail properties appear to be over as they weigh the costs of sticking with high asking rentals against the risk of rising vacancy rates.
In On Lan Street in Central, a narrow alleyway that has become home to upscale boutiques, the landlord of a store now occupied by luxury French shoe and bag designer Christian Louboutin initially asked for HK$400,000 a month, but settled for HK$320,000 a month rather than risk losing the tenant.
Nearby, the landlord of space rented by Dsquared2 slashed the rent from HK$1.1 million to HK$800,000 before the designer brand agreed to move in.
After two years of explosive growth, rental increases in core shopping areas began moderating in the third quarter of last year, and falling in some prime locations, according to Savills Research & Consultancy.
"Asking rents of prime street shops, with the exception of Canton Road, have come down by 10 to 15 per cent across the board since the end of 2012," said Susan Maclennan, a director at Savills. "The only rental growth seen within prime shopping districts are those in third-tier streets, which are considered the fringe."
The fall in rents comes as more big-spending mainland tourists opt to go to Europe for their shopping sprees rather than come to Hong Kong, and slowing growth in China weighs on regional economies.
LVMH, the French luxury group, reported growth in global sales of 6 per cent, to €13.7 billion (HK$141.2 billion), for the first half of the year, versus 26 per cent growth in the first half of last year. Chief financial officer Jean-Jacques Guiony highlighted "flattish demand" in China during the last nine to 10 months, and said shopper numbers were waning in most shopping malls as well.
But in contrast to lacklustre retail spending at home, spending by Chinese on outbound travel surged by 40 per cent to US$102 billion last year from 2011, data from the United Nations World Tourism Organisation shows.
There was a potential risk for the Hong Kong retail market if the shopping style of mainland spenders changed, said Helen Mak, senior director of retail services at Colliers International. More affluent mainland tourists nowadays prefer to travel to Western countries instead of Hong Kong.
Other market watchers said retail property prices were likely to decline, given waning demand for space and slowing rental growth.
"Rents are holding firm because price corrections in the value of retail property are likely to happen before rents drop," said head of retail for Jones Lang LaSalle, Tom Gaffney.
Rents for high street shops would rise by more than 5 per cent this year, Gaffney forecast, as some landlords clung to the hope of finding cash-rich tenants to backfill their empty spaces.
For prime shopping districts such as Central, Causeway Bay, Tsim Sha Tsui, and Mong Kok, the vacancy rate for street-front shops is currently about six per cent, compared to only 0.71 per cent in prime shopping malls, according to Jones Lang LaSalle.
Property agents put the rate at 10 per cent, and say vacancies are on the rise owing to a mismatch between high asking rents and what the market can digest.
"The rent of shops in first-tier streets will drop by 10 to 12 per cent in the coming year as landlords realise market conditions aren't as bright," Wong said. The forecast decline will come in the wake of a 70 per cent rise in rents since 2008.