CONCRETE ANALYSIS
Concrete Analysis
by

New retail districts a welcome trend but challenges remain

Soaring rents in core commercial precincts have transformed fringe areas, with artisanal shops and eateries moving in

PUBLISHED : Tuesday, 30 September, 2014, 10:55am
UPDATED : Wednesday, 01 October, 2014, 3:49am

Hong Kong has long had its well-established retail districts serving different catchments and budgets, each one offering a slightly different balance of retailers and slightly different price points.

The increasing dominance of mainland tourists as the pre-eminent source of demand in recent years, however, has morphed these areas into high-end fashion, watch and jewellery emporiums with some inevitable loss of local character. Rents have also reached stratospheric levels, increasingly beyond the reach of many local operators.

At the same time, as retailers have begun to feel squeezed by rising costs in traditional districts, new opportunities have presented themselves elsewhere.

The word "retail" comes from the French word tailler, "to cut off or divide", which eventually came to mean the sale of small quantities of things. The same could be said of retail areas as new, smaller, more walkable retail communities have begun to emerge distinct from established precincts, much more in tune with local neighbourhoods.

Transformation has come about for a variety of reasons. New transport infrastructure such as the MTR line is already transforming Kennedy Town alongside an accompanying swathe of new residential developments (almost 1,000 upmarket units), some of which are selling for more than HK$30,000 per square foot.

This means gentrification on quite a large scale for what is traditionally a blue-collar neighbourhood and new retail entrants look likely to extend beyond simply the current food and beverage offerings to encompass, for example, boutique and lifestyle offerings.

In Sai Ying Pun, the hillside escalator's impact is being felt on a more modest scale, especially on Third Street where new restaurants and bars have started to spring up. This mix is unlikely to broaden much further, however.

Elsewhere, lower rents have been the main driver and a good example of this is Sheung Wan, where a thriving commercial-residential community is benefiting from "rent refugees" from fringe Central, often small start-ups.

With a broad local appeal, smaller, more artisanal shops are possible, placing greater weight on diversity and lifestyle, rather than chains. Hotels such as Holiday Inn Express, Ibis Hotel and Courtyard by Marriott have also opened in the area, lending a slightly more international flavour and the potential for some tourist-related retail.

Restaurant, cafe and bar operators provide a great deal of character to these areas and can afford to remain at street level rather than being forced into upper floors as happens in more prime districts.

As part of the larger "NoHo" area, Gough Street has attracted tenants priced out of its larger neighbour SoHo. Once home to family-run stores and printers and now known locally for its casual Cantonese restaurants and art galleries, the Gough Street area's tenant mix was "internationalised" one or two years ago.

Still in its infancy, local lifestyle followed food and beverage and brands such as Ralph Lauren and Agnes B opened soon after. Its Central location and its ability to leverage off better-known areas nearby should provide strong support to the trade mix but the case for luxury fashion has yet to be proved.

Is this trend likely to continue? For the time being, the answer is "yes". New rail lines will, of course, unlock previously hidden gems as we rediscover local neighbourhoods with charm and character. New development, if accomplished sensitively, will also encourage new retail locations.

Star Street is a good example of where new commercial and residential buildings have breathed life into a long-overlooked area. And commercial reality will also drive the trend as rental overheads in more established districts remain stubbornly beyond the reach of the sole proprietor or local retail entrepreneur, pushing them to venture into surrounding untapped micro-markets.

And what about the longer term? Here things become rather more uncertain and I would like to point out a few obvious challenges.

Rents rise in response to a successful retail environment and inevitably local landlords will follow the more prime areas and begin asking for more. This need not be a problem if the demand is there, but sometimes inexperienced landlords fail to consider the tenant's business case and over-ambitious asking rents result in empty units and less appealing or blighted neighbourhoods.

Landlords also need to be able to work together to maintain an attractive and coherent mix of trades and tenants, while being mindful of the needs and wishes of the local community. The ambience of these types of area is central to their appeal but could prove to be surprisingly fragile.

Nick Bradstreet is head of retail at Savills Hong Kong