Landlords forced to lower asking rents as mainland tourist spending falls

Decline in number of big-spending mainland tourists has hit sales of luxury goods, forcing owners to be more realistic in their rent demands

PUBLISHED : Wednesday, 09 July, 2014, 5:02am
UPDATED : Wednesday, 09 July, 2014, 5:20pm

Property investors who bulked up their retail portfolios in recent years have found themselves on the wrong end of a bet on mainland shoppers driving a sustained boom in sales.

With retail sales falling in Hong Kong, as mainland visitors tighten the purse strings, owners of shops in core districts are cutting asking rents by up to 40 per cent.

Investors had been willing to pay a premium to snap up shops in major shopping areas - such as Causeway Bay and Tsim Sha Tsui - on expectations that rental yields would rise from as low as 1 per cent to up to 4 per cent when the old leases expired.

The changing habits of mainland tourists put paid to such hopes; now, these landlords are adjusting to a more sober outlook.

International luxury brands ... are no longer expanding aggressively
Joe Lin, CBRE

"Retail investors began to cut the asking rents of their shops by 16 to 40 per cent in early June," said Kenneth Yau, senior district sales director at agency Centaline Property.

According to agents, a two-storey property at 468 Jaffe Road in Causeway Bay had been left vacant for two years as the landlord held out for a monthly rent of HK$1.35 million. Last month, the owner accepted less than HK$1 million a month from a fitness centre operator.

"Investors began to cut the asking rents because high-income mainland tourists have now changed their consumption habits. Another factor is that the vacancy rates for retail shops in second and third-tier streets in major shopping districts are increasing," Yau said.

While landlords in prime districts are still securing rent rises, the giddy increases of recent years are making way for more market-based adjustments. Rents for shops in such districts will rise 20 to 30 per cent after their leases expire, says consultancy CBRE, compared with growth of 50 to 80 per cent in 2013.

Figures from consultancy JLL showed that rents for shops in main streets in prime locations grew 0.2 per cent in the second quarter, compared with a 0.5 per cent rise in the first quarter.

The city's retail sales in May dropped 4.1 per cent year on year to HK$39 billion, government data shows. The largest decline was for big-ticket items such as jewellery and watches, with sales plunging 24.5 per cent from the year-earlier month. In contrast, sales of clothing and cosmetics continued to grow, at 3.7 per cent and 8 per cent, respectively.

Not only are mainland tourists spending less, the growth rate in visitor numbers has slowed to 13.1 per cent in May from 14.7 per cent in April.

"International luxury brands, in particular jewellery and watches retailer, are no longer expanding aggressively as they did before," said Joe Lin, executive director of retail services at property consultancy CBRE.

"They are considering renting shops in second-tier streets in core shopping areas where retail sales remained strong last year. However, some of the brands have found that shopper traffic was low. So now they have begun looking for shops in the first-tier locations only."

While these prime locations gave luxury retailers the desired exposure, Lin said they would be more attuned to market rents. "Earlier this year, we expected retail rents will grow by up to 5 per cent this year. Now, we believe rents will be flat," he said.