Drop in retail sales to drive Hong Kong shop rents lower

In what is one of the largest single-brand shops in Hong Kong, Prada opened a two-storey store in Russell Street, Causeway Bay, before the Lunar New Year, 18 months after the Italian luxury brand signed a leasing contract reportedly worth HK$9 million a month.

That was at the peak of the city's retail sales sector, but now the brand - like all retailers - is contending with Hong Kong's worst slump in sales since the 2003 Sars outbreak.

If that was not bad enough, Prada's opening comes on the heels of renewed talk of limiting visitor numbers from mainland China, the major buying force for luxury retailers in the past decade. The city received 60.8 million visitors last year, 47.2 million from mainland China.

"Retailers of luxury goods have been facing slow sales over the past 18 months as consumption patterns changed due to mainland China's slowing economy and anti-corruption campaign. The trend will continue in the wake of falling consumption by mainland Chinese tourists," said Jacqueline Tong Chun-ling, an executive director of property investment firm Gale Well Group, which owns retail space in Wan Chai, Tsim Sha Tsui and Jordan.

If the space Prada occupies were offered for lease now, achievable rents could be 10 or 20 per cent lower, said Tong, citing downward pressure from the sales slowdown.

Hong Kong saw a decline of 14.6 per cent in retail sales in January, the city's worst monthly performance since April 2003 when retail sales fell 15.2 per cent. Jewellery, watches, clocks and valuable gifts were among the hardest hit in January, sliding 21.4 per cent.

Nick Bradstreet, a deputy managing director and head of retail at Savills, said: "We do see rents on the street falling more than we thought last year." Savills had forecast a decline of 5 to 10 per cent, but Bradstreet said the fall could be 15 to 20 per cent in 2015. "The secondary streets will be hit worse," he added.

Tom Gaffney, the regional director and head of retail at JLL, said slower sales in luxury items meant retailers would fight for a better deal in leasing new space, with the major driving force in the leasing sector this year coming from mid-tier brands such as fast fashion.

These players had tighter margins, so their weaker affordability would inevitably affect rents, said Gaffney, who expects a 7 per cent rent drop in street shops.

He said demand in traditional core retailing locations was enough to sustain rents, adding that malls would be less affected with an estimated zero to 3 per cent growth this year due to tight supply. And he does not believe there will be tough restrictions on individual mainland Chinese visitors.