Hong Kong Landlords Asked To Reduce Rents For Luxury Retailers
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Rents in what were the world’s most expensive shopping streets have fallen by as much as 40% as the impact of China’s slowing economy on Hong Kong’s once-booming luxury goods industry deepens.
From Prada (OTCMKT:PRDSY) to Gucci-owner Kering (OTCMKT:PPRUY), companies in the sector are calling on landlords to cut high rents, raising the prospect that store closures will accelerate.
HK is the world’s biggest market for Swiss watches and many other luxury goods; handbag maker Coach (NYSE:COH) vacated its prime corner store in the business district that is being taken over for less rent by German sportswear group Adidas (OTCMKT:ADDYY).
The macro background is grim. The end result is that people are spending less on big-ticket discretionary items, with watches and jewelry hardest hit. But now it is filtering down to luxury fashion and cosmetics according to the data.
Annual sales of watches and jewelry, a Key indicator for the wider luxury goods market 2X’d in Hong Kong between Ys 2010 and 2013, peaking at $15-B before reversing over the past 2 years. In the 1st 8 months of this year, sales were down by 14% compared with the same frame last year.
The corruption crackdown launched by President Xi Jinping in Y 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 travel overseas in growing numbers.
Growing animosity among Hong Kong residents towards their Mainland neighbors has also encouraged some Chinese tourists to shun the city.
John Zhu, an economist at HSBC (NYSE:HSBC), said that while retail only accounts for 5% 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 is no reason why that should last for ever,” he said.
As rents began to ease last year, HK 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% higher in Spring 2015 than a year earlier, the Real Estate Board of New York said.
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.
Most retail leases run for 2 or 3 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 (NYSE:JLL), a real estate group, said that many high street landlords will have to continue cutting rents when leases expire, especially in areas such as Causeway Bay that have a high density of jewelry and watch shops.
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