Ground-level shop owners are cutting rents to lure back retailers stung by overexpansion and lower than expected profits Landlords of street-level shops in Hong Kong have lowered their asking rents by up to 30 per cent as retailers that expanded too aggressively move to lower-cost areas. A slowdown in retail sales since the third quarter of last year has prompted retailers to avoid repeating last year's mistake of over-expansion. As a result, even landlords of shops in busy areas are looking at rents more realistically. Paul Law, director of jewellery retailer Luk Fook Group, said many retailers had rushed to expand in the first half of last year - even accepting high rents - in the hope that Disneyland would boost sales. But retailers had become more cautious since the novelty of Disney had worn off. Eight interest rate rises since last March mean higher mortgage instalments for many homeowners, and less disposable income. Overall retail sales growth for this year is expected to be less than 5per cent, according to the Hong Kong Retail Management Association. Last year, total retail sales grew 6.8 per cent compared with 2004. Centaline Property Agency has a conservative forecast for retail expansion this year. General manager Stanley Poon forecasts shop rentals will rise only 10 per cent to 20 per cent. Doubling rents have put many long-time tenants of grocery shops, pubs and restaurants out of business over the past two years. Cosmetic retailer Bonjour warned early this month that it might suffer a loss when it reports its earnings results for last year, partly due to high rent costs. 'Landlords are more realistic and have reduced their asking rents by 20 per cent to 30 per cent,' Mr Poon said. Colliers International research head Simon Lo Wing-fai said he had seen a slower pace of growth in rents for street-level shops in Causeway Bay and Mongkok - Hong Kong's most expensive shopping districts by rent. 'Landlords are not as crazy as before [when they] raised asking rents almost every month. They are offering more room for negotiation,' he said. Retailers that could afford to pay higher rents have been hurt because they have not achieved the profits they envisioned and have had to move to cheaper premises. Chartersince Surveyors associate director Desmond Poon Chi-ming said most retailers with higher budgets for rent, such as mobile phone, cosmetics and electrical appliance shops and slimming centres have quietly relocated from expensive locations to areas charging lower rents. 'The negative impact of soaring rents has gradually emerged,' he said, noting that some retailers had been forced to downsize. Some chains that used to have two shops in the same street have cut back to one. However, Mr Poon said landlords on Russell Street in Causeway Bay and Sai Yeung Choi and Nelson streets in Mongkok had resisted lowering rents because of tight supply. 'Owners with a sound financial status prefer to leave their shops empty, even for years, instead of dropping prices. This is because lower rental yields will affect the resale value,' he said. International brands, in stark contrast to local retailers, are continuing to open flagship shops of 3,000 sqft to 8,000 sqft. 'They are willing to pay higher rents as long as they are in prime locations,' said Lawrence Heung Ping-chung, retail director at property consultant DTZ Debenham. Designer label Chloe plans to pay $600 per sqft for 3,000 sqft on the ground floor of the Mandarin Oriental hotel, according to sources, making it the highest rent-paying tenant per sqft in Central. De Beers will set up a 5,500 sqft shop in St George's Building, next to the Mandarin, at an estimated rental of $1.3 million a month - about 63 per cent more than that paid by the previous tenant, who signed a lease in 2003. One Peking in Tsim Sha Tsui is a favourite Kowloon location among international brand names. Sources said Dior Homme would open an 8,000 sqft shop in the basement of the building. Miu Miu has taken the Fendi premises in the same development. It now has a shop of 3,000 sqft spread over the ground and first floors. Jones Lang LaSalle regional director for retail Jeannette Chan said: 'We have received many inquiries from overseas retailers - including Japan, South Korea and Europe - planning to open their first shops in Hong Kong.'