Hong Kong retail rents will continue to fall in next year, says brokerage

In more than three decades in Hong Kong’s real estate industry, Sheraton Valuers’ Michael Chik Pa-fai has seen a number of up and down cycles. With retail sales falling, the managing director of the retail property-focused brokerage expects the slump in retail rents to last for at least a year before the market finds its bottom.

Q: We saw street shop rents falling sharply in Causeway Bay and Central in the last quarter. Will the falls stop?

A: I do not think so. The falling trend began when luxury brand Coach terminated the leasing contract of its Central shop due to slow sales of luxury goods. Adidas will now move into the three-storey shop for lower rent. The fall led to a domino effect and extended the pressure to Causeway Bay in the third quarter, and it will spread to Tsim Sha Tsui soon.

There are still a number of shops vacant in Causeway Bay, such as those in the second-tier street Percival Street. One landlord of a Percival Street shop wanted to rent out his shop with a monthly asking rent of HK$450,000 in May this year, but no one showed interest. The shop was recently sold and the new owner cut the asking rent to HK$300,000 a month but so far it has not found a tenant.

In Central’s China Building at 29 Queen’s Road Central, landlord Cheung Kong Property Holdings is still looking for a tenant to fill the vacant space after Italian brand Baldinini left at the end of July. Baldinini rented shops three to five on the ground floor as its Hong Kong flagship store at the beginning of this year. It moved in after Asia Commercial Holdings’ shop that traded Rolex luxury watches moved out.

Q: Are there any tenants still planning to leave before leases expire?

A: There are quite a lot. When retail sales were good and mainland tourists rushed to visit Hong Kong, retailers opened more than one shop on one street. Now they are considering closing the worst-performing ones. The lease of Puyi Optical’s shop at 116-120 Canton Road will expire next month. It is understood that it won’t renew the lease because it has another shop on the same street.

Q: When will the market stabilise?

A: The pace of rent correction in Causeway Bay is slowing after the recent decline. Rents will start to fall on Canton Road when a number of leases expire at the end of this year and next year. One example is that Asia Commercial Holdings moved into three shops in Manley House at 86-89 Canton Road in 2013 for a monthly rent of about HK$6.3 million. The retailer has been planning to sublet one shop with an asking rent of HK$1.3 million with the aim of reducing rental pressure. But it has yet to find a taker.

When there is vacant shop, landlords of shops on the street will feel the pressure. New leases for some shops on Canton Road will be 30 per cent below old leases.

It will take a year to let the market find its bottom. It will go back to the rental level in 2011. Rents have jumped too fast over the years. Before Asia Commercial moved into the three shops in Manley House, Sa Sa International occupied the shops at a monthly rent of HK$1.59 million. Rents jumped more than fourfold.

The recent downturn will pull rents down. Rents for this kind of shop will be less than HK$1 million.

Q: Is it the worst time you have seen?

A: Definitely not. The worst times were the years between October 1997, when Asia suffered a financial crisis, and 2003, when Hong Kong was hit by the severe acute respiratory syndrome (Sars) outbreak. The whole market picked up in 2004, bolstered by the introduction of the Individual Visit Scheme, announced in 2003, and rents have kept rising since then.

The good news is mid-range brands, which had been forced to move to secondary or tertiary locations to make way for luxury-market retailers, are taking advantage of the current market slowdown for opportunities to return to prime shopping districts. For example, Hong Kong-based cosmetics retailer Bonjour has returned to Russell Street, one of the world’s most expensive shopping streets.

Q: What is Sheraton Valuers’ background?

A: Chairman Yam Wing-Yin founded the company in 1985. We specialise in the sale and leasing of shops and commercial premises. Our retailer clients include well-known brand names such as Emperor Watch & Jewellery, Chow Tai Fook Jewellery, Prince Jewellery & Watch, Sa Sa and Bonjour.