Hong Kong mall landlords shift to charging base rent

Landlords of shopping malls are gradually shifting to charging tenants a base rent as a way to maintain stable rental income amid a decline in spending by mainland Chinese tourists, industry experts say.

As Hong Kong retail sales flourished in the past 10 years, it was common practice for shopping centre operators to charge a base rent that shifted to a turnover rent once sales exceeded an agreed threshold.

"In general, retailers selling luxury items are paying turnover rents as they have benefited the most from the influx of big spenders from mainland [China]," said Thomas Lam, the head of valuation and consultancy at Knight Frank.

Most luxury brands occupied prime locations such as the first and second floors of shopping malls, he said. He attributed landlords' shift in policy to relying more on base rent to the fact that Hong Kong retail sales were on a downward trend.

To avoid volatility in rental income, he said developers started to adopt a base-rent policy several years ago in response to softening retail sales.

Helen Mak, a senior director at Colliers International, said most shopping centre landlords would continue charging either base rents or turnover rents, whichever was higher.

Retailers selling fashion, watches and jewellery - which generated higher sales returns than other items - could be charged 15 to 20 per cent of their turnover in rental once sales exceeded an agreed threshold.

Supermarkets were likely to be charged a single-digit percentage in view of their thin margins, she said.

For instance, a shopping centre landlord might forecast a particular retailer could generate monthly sales of HK$600,000 after leasing a 1,000-square-foot shop for a base rent of HK$100,000 a month.

The lease would include a clause saying the landlord would receive 15 per cent of the value of sales once the retailer exceeded that HK$600,000 threshold.

Under the turnover rent policy, the landlord would receive HK$120,000 a month when the retailer managed to generate HK$800,000 in sales.

"The turnover rent policy will also serve as a benchmark to help landlords maximise the sales per square foot and improve the trade mix of a shopping mall," she said.

But the gradual change in policy indicated retail sales were coming off the boil, she said.

Swire Properties, which owns Pacific Place, Cityplaza and Taikoo Place, and Hysan Development, the largest landlord in Causeway Bay, said they relied more on base rents than turnover rents.

Last week, Swire chief executive Guy Bradley said the move away from turnover rents was unaffected by the declining spending by mainland Chinese tourists.

"Less than 20 per cent of the group's retail rents came from turnover rents," he said.

Hong Kong saw its retail sales slump 14.6 per cent in January, the biggest fall since a 2003 Sars outbreak.

Sales fell to HK$46.6 billion, the Census and Statistics Department said.

"Landlords will probably face a decline in rental income if the majority of tenants pay in base rents," Mak said.