Hong Kong property

Hong Kong landlords ponder how to fill large retail spaces as consumer slowdown gathers pace

  • Veteran property observers urge landlords holding vacant retail space to subdivide and reduce rents
  • Potential lease termination by HMV begs the question of what other tenants can fill the vacuum as consumer spending softens
PUBLISHED : Wednesday, 12 December, 2018, 9:31am
UPDATED : Wednesday, 12 December, 2018, 9:30am

Hong Kong landlords are likely to struggle to find suitable tenants that could fill the three large retail locations currently occupied by troubled music retailer HMV – with floor space as big as 40,000 square feet – in the city’s most prime locations.

The future of the HMV shops in Central, Causeway Bay and Kowloon Bay have been in question after the landlords of the respective spaces filed separate lawsuits over the past two weeks collectively seeking more than HK$5 million (US$639,738) in unpaid rent and other charges.

A potential lease termination by HMV begs the question of what other retail tenants would be in a position to take up such large spaces.

Veteran property observers say the best solution for landlords holding vacant retail space is to subdivide and reduce rents.

“Retailers are not willing to open a new store or expand at this moment,” said Helen Mak, head of retail services at Knight Frank. “One single tenant taking up such a large space would be impossible. Landlords, particularly those holding large empty spaces, just have to cut rent.”

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High street retail rentals in Central are likely to drop 10 per cent while Causeway Bay, Tsim Sha Tsui and Mong Kok may see a 5 per cent decline by the end of 2018, according to data from Knight Frank.

And that is not the end of the downward cycle.

In 2019, the property broker expects a further 5 per cent drop in rents in the four shopping districts.

“Most retailers are quite cautious,” said Lawrence Wan, senior director of retail at CBRE Hong Kong. “Landlords holding large empty spaces to lease need to be more flexible in cutting into small units.”

HMV’s flagship store in the Pearl City building on Paterson Street Causeway Bay occupies three and half floors in a layout of more than 40,000 sq ft, while the concept store at Manning House on Queen’s Road Central occupies 9,700 sq ft.

Food and beverage concepts, particularly fast-food canteens or traditional Chinese restaurants might be interested in taking up space during the softening retail market, according to Wan, who urged landlords to think out of the box when it comes to finding new tenants.

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“Food and beverage, clinics, barber shops or grooming shops – all could do,” said Wan.

However jewellery or watch stores, which have been a pillar of the retail rental market in recent years, are unlikely to take up the additional space as many have been downsizing in recent times.

Oriental Watch has reduced the amount of leased floor space at its Central location by nearly 70 per cent to 6,500 sq ft, paring back from a previous 20,000 sq ft space.

“A flagship sportswear brand may be the only option for such a large space in Causeway Bay. But under the current market sentiment, which brand would launch such a big store at such an important location hastily?” said chief executive Daniel Wong Hon-Shing of Midland IC&I Group, referring to the Paterson street location occupied by HMV. “No matter whether the landlords subdivide or not, they just have to cut rents at this moment.”

Retail sales in Hong Kong rose 5.9 per cent year in October on year, higher than a 2.4 per cent gain in September.

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However, analysts are generally downbeat about the unfolding outlook for the retail sector, expecting retail spending to contract in coming months.

“We believe the seemingly better retail sales figures in October were due in large part to the recently opened high-speed rail and the Hong Kong-Zhuhai-Macau Bridge. However, this temporary rebound is not likely to reverse the structural slowdown in Hong Kong’s retail sales,” said Alan Jin, a property analyst at Mizuho Securities. “We expect a mid-single-digit decline in retail sales in Hong Kong in 2019.”