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Hong Kong at risk of losing retail rent crown

Hong Kong's Causeway Bay shopping district.
PHILIPPE LOPEZ | AFP | Getty Images
Hong Kong's Causeway Bay shopping district.

Hong Kong's frenetic Causeway Bay shopping district is at risk of losing its crown as the world's most expensive retail space as a slowdown in mainland tourists hits store sales, paving the way for the first drop in retail rents in a decade.

Hong Kong shop store rents stood at around HK$4,331 ($560) per square foot in the first quarter - about 25 percent higher than those in New York and almost triple similar rents in Paris, the world's second and third most expensive cities for retailers respectively, according to property services firm CBRE.

But China's economic slowdown and a high-profile anti-corruption drive has taken a lot of the fun out of the kind of conspicuous consumption mainland tourists come to Hong Kong to enjoy.

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That means luxury retailers in glittering Causeway Bay are finding it a little tougher to sell big-ticket items like jewelry, reducing their ability to afford the area's high rents and threatening to knock Hong Kong off its perch as the most sought-after retail space in the world.

"China was the only girl in the dance. Now as China's growth has started to moderate ... brands are seeing there are other markets around," said Sebastian Skiff, executive director of Asia retail services at property consultancy CBRE.

"I probably do see New York regaining the No.1 spot in the not too distant future - within 2014 or into 2015."

Official figures show growth in mainland tourist arrivals slowing this year, while growth in spending by overnight visitors including mainland Chinese dropped to 3.9 percent in 2013 from 11 percent two years earlier.

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The city posted a revised 9.9 percent fall in April retail sales from a year earlier, its worst monthly record since 2009. May showed a 4.1 percent drop, the fourth straight month of decline. Hong Kong's Retail Management Association has revised down 2014 retail sales growth forecasts.

Property consultancies are also slashing their forecasts for 2014, with CBRE saying rents could fall for the first time in a decade. Knight Frank and Savills now says prime street rents could drop 5 percent to 10 percent, down from its earlier forecast of a possible 5 percent gain.

Joanne Lee, research manager at property consultancy Colliers, said overall rents for street shops in the city's four main shopping districts would fall this year.

"Causeway Bay will see a sharper decline subject to rising vacancies," she added.

Out with the old

That drop will not be enough to keep some of the area's oldest remaining tenants - soaring rents have already seen noodle shops and tea restaurants replaced with high-end stores such as Tiffany & Co, Burberry and Rolex.

Siu Kam-lin, 65, who sells preserved bean curd near Russell Street, recalls the pungent fish odors that wafted around Causeway Bay more than 50 years ago.

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"In the past, these two streets (Tang Lung Street and Russell Street) were very dirty. Anyone who was a little tidy would not come here," said Siu, whose family business has been in the area for 60 years.

"It used to be a street for people to fix frying pans and sell lanterns," she added.

Siu said she would be forced to move as her landlord is seeking HK$240,000 a month, from HK$40,000 a decade ago.

Prime shop rents have more than tripled during the past decade in Causeway Bay, where a tiny 122 square foot (11 square meter) shop was sold in March for HK$180 million ($23 million).

But as daily necessities such as baby milk powder replace high-end Gucci handbags on mainland Chinese shopping lists, rents have started to stabilize and some international brands are becoming cautious.

"In the last 12 months, we observed that some international jewelry and watch brands have slowed expansion plans here," CBRE retail services executive director Joe Lin said.

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Others are trimming costs. Beauty products retailer Sa Sa International has in December moved its street-level store on Russell Street to more affordable space on the first floor of another building on the same street.

Some local fashion brands have seized the opportunity to move closer to the city center, although analysts saw no chance of a comeback for noodle shops and tea houses.

"It's very difficult," Lin said. "Even if the rents go back to the previous level, they can't afford it."

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