Hong Kong Rents Push Out Mom and Pop Stores

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Nam Kee Noodles is a typical Hong Kong restaurant: functional, popular and busy.

A dozen plastic-topped tables offer room for about 40 patrons. Customers line up outside at lunchtime, waiting to consume spicy noodle soup, dumplings and iced soy milk amid the clatter of plastic bowls and chopsticks.

In April, however, the little restaurant, in the heart of Causeway Bay, one of Hong Kong's busiest shopping districts, nearly had to shut down after the landlord tripled the already-expensive rent.

"We were paying around 200,000 dollars a month," said Au Kei-hong, the shop's manager, referring to an amount in Hong Kong dollars equivalent to about $25,800. "But the landlord then increased it to 600,000. It was too expensive. We cannot afford that."

After frantic negotiations, Mr. Au agreed to a smaller — though still steep — increase that has allowed him to stay put for an additional year.

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Others have not been so lucky. Soaring rents have forced at least three small businesses on the same Causeway Bay street to move or close in the last few months, and similar tales of woe are common among small businesses in other prime areas in the bustling, crowded city.

Rapid growth and sweeping economic changes have raised retail rents in many of Asia's growing metropolises in recent years. But nowhere have they reached the heights of Hong Kong, a banking, logistics and trading hub that many companies see as a testing ground and launching pad for the vastly larger mainland Chinese market.

Hong Kong's residential property prices have fallen from their recent highs mainly because of government measures intended to cool demand — but those measures do not affect retail rents.

"It's a normal phenomenon for small retailers to be squeezed out by high rents. It happens everywhere," said Joe Lin, executive director of retail services at the real estate services firm CBRE in Hong Kong.

"But in Hong Kong, the pressures have become very severe in the last two to three years — it's very unhealthy. Luxury and jewelry now dominate 90 percent of the space in prime locations," Mr. Lin said. "The whole trade mix in some of these areas has changed."

Causeway Bay, where Nam Kee Noodles is struggling to survive among high-end clothing and watch retailers, commands the most expensive retail rents in the world: an average of 1,950 Hong Kong dollars, or $251, per square foot per month, according to figures for the first quarter of 2013 from Cushman & Wakefield, a real estate consulting firm.

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Two other Hong Kong neighborhoods, Tsim Sha Tsui and Central, also rank among the five most expensive locations in the world — with Fifth Avenue and Times Square in New York — easily topping luxury shopping destinations like the Champs-Élysées in Paris and the Ginza in Tokyo.

That has squeezed out many of the colorful mom and pop stores — hardware shops, fruit stalls, herbal medicine vendors, restaurants — that form a large part of Hong Kong's business ecosystem, changing the face of many neighborhoods in the process.

A few minutes' walk from Central, which is home to Hong Kong's financial district, Ngau Kee Food Cafe, which for many years sold traditional Cantonese dishes to diners perched on rickety stools, closed in April after the landlord raised the monthly rent to 120,000 dollars from 49,000.

The restaurant's owner, Mak Ping-kuen, says he hopes to reopen in another part of town but has struggled to find a site.

"I hope we can reopen as soon as possible. My customers are getting impatient," he said.

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Nearby, two popular bars in the SoHo district have closed in the last few months, again because the owners could not afford big rent increases.

And Tsui Yuen Desserts, which sold delicacies like ginger-flavored milk custard and sweet black sesame soup for less than 20 dollars a bowl (about $2.50), had to relocate from Causeway Bay to Wan Chai, a neighborhood more geared to night life than to hungry tourists.

"Sure, we have some old customers who still come for a bowl of dessert, but it's a lot quieter now," said the manager, Mr. Ho, who would give only his last name. "We want to go back to Causeway Bay, but we can't. Even a small little shop would cost us 200,000 dollars a month. Going back would bankrupt us."

In the wake of the displaced businesses, luxury goods retailers and jewelry and cosmetics shops have flocked en masse to Hong Kong in recent years, seeking to cater to a flood of shoppers from neighboring mainland China.

The British clothing retailer Topshop, for example, opened a large store in Central — its first in greater China — in early June, while Apple and the Japanese clothing retailer Uniqlo opened huge outlets around the corner from Nam Kee Noodles in the last few months.

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Taxes on high-end goods are far lower in Hong Kong than in mainland China, so those goods in particular are popular with mainland shoppers. At the same time, the number of visitors from the mainland has soared since travel restrictions for them were loosened in 2003 to help Hong Kong weather the economic blow dealt by an outbreak of severe acute respiratory syndrome, or SARS, that year. In 2002, 6.8 million mainlanders visited Hong Kong. Last year, the number was 35 million.

The money they have spent has helped drive economic growth in Hong Kong and makes up a sizable part of the economy and the local job market.

Chinese visitors spent the equivalent of almost $23 billion in Hong Kong in 2012 — equal to about 9 percent of gross domestic product — and that figure, said Donna Kwok, an economist at HSBC in Hong Kong, is likely to rise to about $60 billion by 2015.

Hong Kong's resulting attractiveness to companies that want to lure those visitors has helped drive up retail and office rents.

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Shop rents in Causeway Bay, for example, have risen about 80 percent since mid-2010 and have more than doubled since 2007, according to Cushman & Wakefield.

Moreover, analysts say, no relief is in sight, although the mainland Chinese economy is cooling.

"China's economy may be slowing, but this does not mean that demand is going to evaporate," Ms. Kwok said. "Chinese shoppers will keep coming to Hong Kong."

And as long as they do, Mr. Lin of CBRE said, retailers will want to increase their presence in the city, ensuring that shop rents will stay high.

Mr. Ho of Tsui Yuen Desserts said: "Ten or 20 percent increases over the years were reasonable. But a 100 percent increase — we can't pay that. How many bowls would we have to sell just to cover the rent?"