IF YOU WANTED to stop for a cup of coffee while shopping in Hong Kong’s Causeway Bay and not pay Starbucks’ prices, you could go to a local café like Gourmet Coffee on Hysan Avenue. Gourmet Coffee has been a neighbourhood fixture since it opened 13 years ago, serving affordable beverages and snacks. Last month, however, it was forced to close its doors and look for new premises after it was slapped with a 50% jump in its rent.
Gourmet Coffee was a no-frills, oldfashioned coffee shop but it enjoyed one luxury. It occupied street-level premises in one of Hong Kong’s most popular shopping districts. For a city packed with skyscrapers, that was a luxury few retailers could afford. Street-level space is increasingly out of the reach of low-margin small businesses. In 2Q, the average rent for street-level shops in Hong Kong’s top four shopping districts — Causeway Bay, Central, Mong Kok and Tsim Sha Tsui — climbed 7.4% to a new record, says Colliers International. Street-level rents are now 11% higher than the last peaks charted in mid-2008.
Demand for such prime space is so strong that some landlords prefer leaving properties unoccupied to settling for lower rents that another tenant may later pay. This surge in demand is coming from retailers with deep pockets — the international luxury brands and the sellers of products prized in East Asia such as high-end timepieces and gourmet food like shark’s fin. In Causeway Bay, rents have rocketed to such an extent that the area is now filled with watch, jewellery and gourmet dried seafood shops. “It is so difficult to find a place to have a bowl of wonton noodles,” says Stanley Lau Chinho, deputy chairman of the Federation of Hong Kong Industries.
BIG BRANDS TAKING OVER
Big fashion names selling apparel, leather goods and accessories have been expanding aggressively in Hong Kong, primarily to serve shoppers from the mainland. Between January and May, retail sales in the territory were up 23.6% y-o-y. According to the Tourism Board, visitor arrivals in the first five months of the year increased 14.5%, with the number of mainland arrivals rising 65.5% alone. Well-heeled Chinese shop in Hong Kong because items such as watches and jewellery can be up to a third cheaper than in China.
This year, British luxury brand Burberry opened seven stores in the region. Of these, five were in Hong Kong. It is now preparing to open a flagship store in Pacific Place, taking over a major portion of the space currently tenanted by department store Lane Crawford. Meanwhile, Abercrombie & Fitch, a retailer of upmarket casual clothing, has leased several floors in Pedder Building in Central, where it will open its first store in the territory.
A similar story is unfolding in Taipei. At the city’s tallest tower, Taipei 101, an entire floor once dominated by F&B outlets is being remodelled to accommodate luxury retailers such as Christian Dior, which is reportedly setting up a new outlet measuring 18,000 sq ft, which would be among its largest globally. At the Pacific Sogo department store, Cartier has expanded its retail presence and watch brand IWC has opened a store. Sogo estimates that Chinese tourists account for 5% of its total revenues. Taiwan relaxed restrictions on visitors from the mainland in 2008 and, beginning June 28 this year, individual tourists from China can travel to Taiwan, with numbers capped at 500 a day.
CHINA TAX CUT
In Hong Kong, Colliers International predicts the average rent of street shops in the territory’s prime shopping districts will grow a further 15% in the next 12 months. That suggests more and more mom-and-pop stores will have to move out — or up. Increasingly, landlords are finding it lucrative to turn office space into retail space, creating towers with a mix of offices and shops selling sandwiches or stationery.
However, they will have to bear in mind Beijing’s ongoing effort to lower taxes on imported luxury goods. The Ministry of Commerce said on June 28 that it had reached a consensus with other government departments to reduce import tariffs to spur domestic consumption, a key objective of China’s five-year plan to 2015. It is uncertain how much the tax cut will be and when it will kick in. But estimates are that duties on items such as watches, jewellery, gold and silver ornaments could be cut to 2% from 15% to 30%.
In April, the Chinese government introduced a tax-rebate scheme on Hainan Island to encourage purchases of premium products within China. Prices of certain brands of watches and cosmetics are now close to prices in Hong Kong. Hainan Island has since seen a significant pick-up in domestic visitors and Daiwa Capital Markets estimates that the total retail value of gold, silver and jewellery sales in China could rise 19%, assuming that the scope of the tax rebates are widened and that 80% of such high-end products purchased by mainland visitors to Hong Kong shift back to China.
That poses a significant risk to retailers — as well as landlords — in cities such as Hong Kong, where the shopping mix is changing rapidly to suit China’s growing taste for luxury brands, nudging out once-thriving small businesses like Gourmet Coffee from the city’s main shopping belts.
