HK rents chasing retailers away

H&M will close its flagship store in Queen's Road Central next year and is seeking new store space elsewhere in Hong Kong - PHOTO: BLOOMBERG

[HONG KONG/SINGAPORE] Hong Kong's main shopping district is gaining on New York's 5th Avenue for the title of world's most expensive retail zone as rents rise by 35 per cent a year, pushing chains such as H&M out to the cheaper suburbs.

Swedish fashion chain Hennes & Mauritz's first store in Asia was a 30,000 sq ft flagship in Central, the heart of Hong Kong. But with the lease up for renewal and the rent set to double, the world's second-largest clothing retailer will close the location next year and seek new store space elsewhere.

Space has always been at a premium in Hong Kong, an island-city, like Manhattan, where developers plant high-rises on every available inch. Retail rents in prime shopping areas are rising more rapidly here than in New York, London or Paris.

Average annual rent along Hong Kong's Queen's Road Central - where H&M's soon-to-be-closed flagship store is located - soared to US$1,831 per square foot in March, up 35 per cent from a year earlier, data from real estate brokerage Colliers International shows. On New York's 5th Avenue, average rents rose 23 per cent to US$2,633 per sq ft.

Colliers estimates that Hong Kong's retail rents will overtake New York as early as 2014.

"Hong Kong rents are going through the roof," said Sally MacDonald, chief executive of Australian handbag and accessories maker Oroton, which has been looking to open a store in Hong Kong but could not find the right fit at the right price.

"It's a concern because that's a market that booms and busts and the rents are probably unsustainable," she said.

Some firms are still willing to pay for a prime location in Hong Kong, long considered the gateway to mainland China - a place to study Chinese buying ha-bits before taking on Beijing's bureaucratic challenges.

Zara, owned by Spain's Inditex SA, is taking over the massive space being vacated by H&M, an unusual case of a direct rival replacing a competitor. It will pay a monthly rent of HK$11 million (S$1.78 million), up from HK$5.5 million, according to Helen Mak, director of retail services at Colliers, which advises companies on leasing shop space.

H&M spokesman Hacan Andersson confirmed that the Swedish retailer could not reach agreement with its landlord and was closing its central Hong Kong store next year.

"There is no drama in this," he said. "We open and close stores regularly to always have the best business location."

Now some global chains are bypassing Hong Kong and jumping straight into China or starting out in South-east Asia instead.

"In the past, even two years ago, you needed the store in Hong Kong in order to be successful in Shanghai," Oroton's Ms MacDonald said. "I think already, you can have the store in Shanghai without the store in Hong Kong and be respected."

Debenhams Plc, the British department-store chain, has two stores in Malaysia via a local partner and plans to enter Singapore later this year. Industry sources say it scoured Hong Kong for years without finding the right location. Debenhams declined to comment.

Retailers have found one way around the high rents: "pop-up" stores that open for just a few months at a time to test demand.

Topshop, the British high-street chain, opened one in May in Shenzhen, just across the border from Hong Kong. The store will close in August. Oroton did something similar in Hong Kong between September 2010 and February 2011, catching both the Christmas and Chinese New Year shopping seasons.

The crush for space is good news for landlords such as Wharf Holdings, Swire Properties, Hongkong Land and Sun Hung Kai Properties, which can push up rents even in suburban malls. Landlords are able to dictate terms in Hong Kong, and retailers often take two years to find a location, if they are able to get space at all.

But with sales growth slowing, sceptics say retail property values look unsustainably high. "Sooner or later the owner of the shops will have to rent the stores to cocaine retailers," John Au-Yeung, a property broker who runs the company Fidelity Realty, said.

"I've been telling my clients not to buy retail space. The rents the retailers are willing to pay is directly based on the revenue they can make." - Reuters