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Foreign Retailers Defy Hong Kong Rental Surge

Enid Tsui in Hong Kong

Mongolian yurts standing on a ferry pier may be a strange sight for Hong Kong commuters on their journey to work but they are a telling symbol of the city’s shifting retail landscape.

The Gap Inc. logo is displayed outside the store in Hong Kong, China.
Bloomberg | Getty Images

The yurts are the temporary home of Shanghai Tang, the luxury brand and Richemont subsidiary, which has just lost its 13-year-old flagship store in a downtown colonial building to Abercrombie & Fitch.

“We are in between stores. We have become the nomads of Central district,” says Raphael le Masne de Chermont, executive chairman of Shanghai Tang.

The Hong Kong retailer lost out because Abercrombie & Fitch offered the landlord around US$1m in rent per month, three times more than what Shanghai Tang was paying, real estate agents say. The US retailer is part of an influx of foreign mid-range retailers defying an average 25 per cent increase in retail rent this year to set up shop in the city in an effort to snare the big-spending mainland shopper.

According to CBRE, the real estate agency, retailers in Hong Kong are this year paying on average about US$1,700 per square foot per year in prime locations, just behind prime areas in Manhattan, the world’s most expensive shopping district, where landlords charge US$1,900 per square foot. Sydney is in third place at US$1,224 per square foot.

Gap, the US clothing retailer, opened its first Hong Kong store last Friday, while fellow US retailers American Eagle Outfitters has already opened and Forever 21 is putting the finishing touches to its first store. Zara and H&M, meanwhile, opened in Hong Kong in 2004 and 2007 respectively.

Hong Kong’s retail market is tiny compared with the estimated US$2,200bn in China’s total retail spending last year but there are a number of reasons why it is proving a huge draw for retailers.

There are many businesses in the city that specialise in bringing new brands to the mainland. By having a shop in Hong Kong first, and doing well there, brands can attract leading distributors to work with them in China, according to Jason Ding, a Beijing-based partner at consultancy Roland Berger.

Also, as China’s most international city, brands that do well in Hong Kong also have a certain cachet and appeal to mainland consumers more than brands that only do well in, say, Shanghai or Beijing, retail analysts say.

However, it is the sheer number of shoppers coming from north of the border that represent Hong Kong’s main appeal. In 2010, 23m visitors came to Hong Kong from mainland China, a 25 per cent increase on the previous year, and they spent about US$13bn in the city, according to the local tourism board. That is 17 times more than the amount Chinese tourists spent in France in the same period.

“I find that prices here are around 20 per cent less than back home in Shanghai, because there is no tax. I am also buying cosmetics and handbags in Hong Kong because the quality is better – you know you are not picking up fakes here!” says Ms Wang, who is on her first trip to the city with her sister.

Such mainland shoppers are playing a large part in the surge in retail sales in the city. Hong Kong recorded US$42bn in retail sales last year, up from US$39.9bn in 2009; and they have grown 17-28 per cent over the previous six quarters alone, year-on-year, according to government statistics.

Competition is so intense that retailers are struggling to find the right kind of shop space. Many of the best spots already taken up by luxury brands. Tiffany, Louis Vuitton, Armani, and other high-price brands were the first western retailers to set up flagship stores in Hong Kong in the early 2000s with a firm eye on mainland Chinese demand. The absence of a luxury goods tax in the city made the shops an instant hit and there are entire streets, such as Canton Road in Kowloon, which are overwhelmingly dominated by luxury brands.

Success in the city has prompted some retailers to tap the demand in the capital markets. Prada, which has eight stores in Hong Kong, raised US$2.2bn in a Hong Kong listing this summer, while L’Occitane, which has 20 stores, raised about US$700m last year. While the two stocks are trading 6 and 8 per cent below their IPO prices respectively, investor confidence in the Greater China retail market – mainland China, Hong Kong and Taiwan – has helped them beat the Hang Seng index, which is down 22 per cent this year.

“Hong Kong is the most capitalist place in the world, and it’s all about survival. Retailers new to the market will soon find out that if they don’t do well, they will end up working for their landlords,” says Mr le Masne de Chermont.