The silver lining in Hong Kong’s retail woes

 —  Article by Beelin Ang
Image credit: Shutterstock
Image credit: Shutterstock

For a while there seemed to be no end in sight to the woes of Hong Kong luxury retailers.

From last year’s pro-democracy protests in the city to the recent devaluation of the yuan on China’s mainland, high-end retailers have just about had enough of falling sales. But of late, a silver lining seems to have appeared in the form of lower rent from landlords.

More than 70 percent of the Hong Kong tourists are from neighboring China. In June, the Hong Kong Tourism Board data showed that mainland tourist numbers slid 1.8 percent, against 7.8 percent growth a year earlier. Among the victims of high rent and poor sales was footwear retailer Baldinini, which recently surrendered its lease in Central Hong Kong, having operated the shop for less than half a year.

“Disappointing sales figures have halted the expansion plans of some luxury retailers – typically those who can’t afford to pay the higher rents in the market – leading rents to fall,” says Denis Ma, Head of Research in Hong Kong. High Street shop rents are already down by about 7.3 percent since peaking in the third quarter of 2014, he adds.

Chanel cuts purse prices

In late 2014, luxury retailers were grappling with weak sales as Occupy Central movement brought trade to a near standstill after roads were blocked as demonstrators demanded universal suffrage.

Earlier this year, a sharply weaker euro, in part prompted by uncertainty over Grexit, led Chinese luxury shoppers to turn to European markets for their branded items. As sales dropped in Hong Kong and in mainland China, Chanel in March reduced the prices of some of its iconic purses in Asia, but increased them in Europe.

The following month the Hong Kong government introduced a rule that limits visitors from the neighboring city Shenzhen in China to one visit per week to Hong Kong rather than making multiple trips. The move was aimed at squeezing out parallel traders who were taking advantage of multiple entry visa polices to import goods from Hong Kong to mainland China, causing a shortage of household goods in parts of the city.

Tiffany shares fell following the rule announcement. In its first quarter earnings release in May, the company said it had experienced “meaningful sales declines in Hong Kong and Macau.”

Hong Kong’s biggest retail landlord

Retailers have been struggling across the board. Retail sales (excluding motor vehicles) were down 4.4 percent in the second quarter of 2015, according to government data.

With the Shanghai stock market rout in June knocking consumer confidence of the middle class and the recent devaluation of the yuan reducing its buying power, mainland Chinese tourists will be skimping on their spending overseas and this will have a notable effect on Hong Kong luxury brand retailers. The yuan has lost more than 3 per cent against the US dollar since the People’s Bank of China shocked the markets by devaluing the currency by 1.85 percent in mid-August, the most in one day in more than 20 years.

Following news of China’s devaluation of its currency, shares in Hong Kong’s largest retail landlord Hysan Development fell and is now down about 14 percent compared with a year ago as investors remain cautious on the sector’s prospects.

A brighter future?

Even before the devaluation, global brands have been pushing landlords to cut rents, says Tom Gaffney, JLL’s Head of Retail in Hong Kong. “Some retail outlets in Central and Causeway Bay had asked for rent reductions of up to a fifth.”

But there appears to be a bright spot in the market. “Based on transactions being completed in the market so far, it would appear that a 30 percent reduction in rents is more than sufficient to pique the interest of retailers,” says Ma. “A number of local retailers and fast fashion and lifestyle store operators are already taking advantage of the more affordable rents in prime shopping locations to open new stores.”

Amid the weak demand for retail space, rents are likely to sustain further falls in the near term and a bottom seems to be insight.

“Although a correction in rents is likely to be painful for some landlords, it will help lead to a more balanced retailing landscape – that is not skewed towards just luxury brands – and a stronger base for future rental growth,” Ma adds.

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