Global Opportunities: Hong Kong

China slowdown weighs on Hong Kong luxury rents

Ben Bland
Billy H.C. Kwok | Bloomberg | Getty Images

Rents in what were the world's most expensive shopping streets have dropped by as much as 40 per cent as the impact of China's slowing economy on Hong Kong's once-booming luxury goods industry deepens.

From Prada to Gucci-owner Kering, companies in the sector are calling on landlords to cut sky-high rents, raising the prospect that store closures will accelerate.

A shop previously occupied by Jaeger-LeCoultre in Causeway Bay is being replaced by a local discount cosmetics retailer that has negotiated a lease about 40 per cent cheaper than the deal agreed by the high-end watchmaker in 2012.

Elsewhere in the city — the world's biggest market for Swiss watches and many other luxury goods — handbag maker Coach has vacated a prime corner store in the business district that is being taken over for less rent by German sportswear group Adidas.

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"There's a grim macro background to what's going on," said Simon Smith, head of research for property agent Savills in Hong Kong. "The end result is that people are spending less on big-ticket discretionary items, with watches and jewellery hardest hit. But now it's filtering down to luxury fashion and cosmetics."

Annual sales of watches and jewellery — a key indicator for the wider luxury goods market — doubled in Hong Kong between 2010 and 2013, peaking at $15bn before going into reverse over the past two years. In the first eight months of this year, sales were down by 14 per cent compared with the same period a year earlier.

The corruption crackdown launched by President Xi Jinping in 2012 made the purchase and display of expensive watches and designer accessories taboo among the government officials and state-owned company executives who drove the incredible growth of Hong Kong's luxury goods retailers.

The slowing Chinese economy has further dented demand for high-end goods in Hong Kong, while currency moves have made alternative shopping destinations such as Japan, South Korea and Europe more attractive to Chinese consumers who are travelling overseas in ever greater numbers.

Growing animosity among Hong Kong residents towards their mainland neighbours has also encouraged some Chinese tourists to shun the city.

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John Zhu, an economist at HSBC, said that while retail only accounts for 5 per cent of Hong Kong's economy, the challenges facing the sector are indicative of the wider issues confronting the semi-autonomous Chinese territory.

"Hong Kong has grown very wealthy in its traditional role as a gateway to China but there's no reason why that should last for ever," he said.

As rents started to ease last year, Hong Kong was overtaken as the world's most expensive place to lease a shop by New York's Fifth Avenue. Rents on the priciest stretch of Fifth Avenue were 4 per cent higher in spring 2015 than a year earlier, the Real Estate Board of New York found.

But while struggling companies are keen to reduce their overheads, Hong Kong landlords have not proved as malleable as the likes of Prada would want.

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Most retail leases run for two or three years and property owners will normally not be willing to renegotiate before the term ends.

Tom Gaffney, head of retail for Hong Kong at JLL, a real estate group, said that many high street landlords would have to continue cutting rents when leases expire, especially in areas such as Causeway Bay that have a high density of jewellery and watch shops.