Good times ending for Hong Kong's retail landlords as rents fall

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.