Hong Kong Businesses Vanish as Rents Soar: Real Estate

Hong Kong Businesses Vanish as Rents Soar: Real Estate

Over the past decade, car-repair shop owner Benny Chan has seen more than 70 percent of his small-business peers disappear as his Hong Kong neighborhood fills up with high-end Western bars and Japanese restaurants.

“Rents here are going up multiple times,” said Chan, who’s been in business since 1985 in the Tai Hang area, just east of the ritzy Causeway Bay shopping district. “We’ll all be out of here in the next four to five years.”

Rents are climbing in neighborhoods near Causeway Bay and Hong Kong’s other prime shopping districts, known for luxury stores that attract free-spending tourists from mainland China. That’s squeezing out mom-and-pop shops, congee and noodle vendors and other small businesses like Chan’s as developers and landlords seek to profit from the trend.“There’s only a limited supply of good spots and the rents are super high” in major shopping districts, Joe Lin, Hong Kong-based senior director for retail services at CBRE Group Inc. (CBG), said in an interview. “It’s natural that restaurants and some retailers would find these fringe areas with an equally hip, high-spending crowd more attractive.”

Shops in Causeway Bay fetch an average $2,630 ($HK 20,417) per square foot a year, the highest in the world, according to a November report by broker Cushman & Wakefield Inc. For a 500- square-foot (46-square-meter) shop, that’s an annual rent of $1.32 million. Across the harbor in Tsim Sha Tsui, retailers including Dolce & Gabbana Srl and Chanel Inc. pay $1,547 a square foot annually. Retail rents in the Central business district, where banks including Goldman Sachs Group Inc. and UBS AG have offices, are $1,856 a year.

Huge Upgrade

Developers are taking advantage of the opportunity. Soundwill Holdings Ltd. (878), a mid-size local builder, last year completed a 163-unit apartment building in Tai Hang and has begun work on another. A block away, the company has plans for a 65,000-square-foot project with Henderson Land Development Co. (12), controlled by billionaire Lee Shau-kee.

“It’s only a 15-minute walk from the world’s most- expensive shopping location,” Soundwill Executive Director Dickson Lau, referring to Tai Hang’s proximity to Causeway Bay, said in an interview at the clubhouse of the 37-story tower. “With all the new restaurants and apartments, there’ll be a huge upgrade in the standard of living in this area.”

Shares (878) of Soundwill, which owns 20,000 square feet of retail space on Causeway Bay’s Russell Street, have risen almost 11-fold since early 2009, after profit tripled in the period. Lau said the group expects rental income to double this year from 2012.

Crazy Rents

To the west of Hong Kong’s Central business district, in the historic areas of Sheung Wan, Sai Ying Pun and Kennedy Town, mom-and-pop shops also are being pushed.

“To open here is risky, but so far we’re doing good,” said Jerome Spitzer, whose Metropolitan restaurant in Sai Ying Pun replaced a neighborhood grocery in March, adding to his three French restaurants in Central. Serving Nicoise salads and tarte tatin, the restaurant has a facade designed to resemble the Art Nouveau metro station entrances of Paris.

“Business is good if you’re already an existing operator in Central,” said Spitzer, whose French Creations group also runs a fifth restaurant in Happy Valley near Causeway Bay. “But to open another new one there — the rent is just crazy.”

Monthly rents for ground-level shops in the up-and-coming fringe areas have risen “multiple times” in the past five years to about HK$40 to HK$60 a square foot, according to Helen Mak, Hong Kong’s head of retail-services at broker Colliers International (COL). Still, at upwards of HK$720 a year per square foot, they remain well below those in top shopping districts such as Causeway Bay, she said.

Giving Way

Tina Sin, a flower seller in her 60s who operated a shop in Tai Hang for almost 30 years, was evicted three months ago after both adjacent stores gave way to a sushi restaurant and a bar. She found another spot in the area — a 50-square-foot stand with no cover that’s about half the size of her original business — at the same rent.

“The new landlord is an old neighbor who’s trying to look out for the community,” said Sin, who has a flower tattooed on her left forearm. “But he also told us that when someone comes in with a good offer for the building, he’ll sell it, and that’ll be the end for us.”

Others weren’t as lucky. Chung Wing-Ho, who ran an automobile-repair shop on the same street as Sin’s old florist spot, moved his business to Sai Wan Ho, near the eastern end of Hong Kong Island, when his landlord doubled the rent to HK$30,000 a month in 2011.

“There wasn’t even room for negotiation,” said Chung. “To double the rent basically means asking us to leave. The margin for our business isn’t very high to begin with.”

Dilapidated Buildings

Henderson Land, Kerry Properties Ltd. (683) and New World Development Co. are among the companies with projects in the Sai Ying Pun area. Kerry in 2010 completed Island Crest, a 488-unit luxury and retail development on a site it bought from a government-funded agency that spent years buying out owners of 30 dilapidated residential buildings — some constructed more than half a century earlier.

New World (17), controlled by billionaire Cheng Yu-tung, will this year begin selling a nearby residential project with about 100 units. The company said last year it expects to market the project at about HK$14,000 a square foot, while the site was acquired at about HK$8,000 a square foot.

Private Investors

Many properties that aren’t bought by developers are owned by private investors who made their fortunes elsewhere, such as in the manufacturing boom in the 1970s, the stock market rally in the 1980s and the real estate surge during the past few years, according to Stanley Poon, chief operating officer at the commercial-property arm of Centaline Property Agency Ltd., the city’s biggest closely held realtor.

Simon Wong, whose family owns two six-story residential walk-up buildings more than 40 years old in the Sheung Wan district, last year replaced a grocery-selling tenant on the ground floor with a wine retailer, doubling the rent.

“It’s just evolution,” said 29-year-old Wong, who helps manage a trading business his grandfather founded almost 40 years ago. “It’s sad for the old tenant, but we have hardly raised the rent in the past. We’re just catching up to the trend.”

Real estate brokers are expecting rental growth in the city’s busiest shopping areas to slow for a second straight year in 2013 as mainland Chinese tourists cut spending on luxury goods and the global economic outlook remains uncertain.

Expansion Pullback

Average prime shop rents in Hong Kong may rise 8 percent this year, down from growth of 9 percent a year earlier and 27 percent in 2011, according to CBRE (CBG), the world’s biggest commercial realtor. New York-based Cushman sees rents gaining about 5 percent this year, according to Michelle Woo, Hong Kong- based senior director of retail-transaction services.

“The drop in luxury and big-ticket purchases has impacted overall retail sales,” said Woo. “We’re seeing a pullback in the expansion of this sector in the second half because of the slight shift in shoppers’ spending patterns.”

Chinese President Xi Jinping, who took over last month, has vowed to crack down on extravagant spending by officials in a bid to show his government’s commitment to rooting out corruption, a declaration that could deter mainlanders shopping for gifts in Hong Kong.

Still, analysts are predicting retail will beat residential and office as the best-performing Hong Kong property market this year, amid government curbs on home prices and a shrinking financial-services industry that’s damping demand for prime office space.

Moving Up

Shares of landlords with large shopping-mall portfolios, including Wharf Holdings Ltd. (4) and Hysan Development Co (14)., will probably outperform those of residential developers such as Sun Hung Kai Properties Ltd. (16) and Hongkong Land Holdings Ltd. (HKL), the biggest office landlord in Central, according to BNP Paribas SA analyst Lee Wee Liat.

Even so, not all retail properties would fare equally well. Some luxury-brand shops are beginning to move from street level into less-expensive shopping malls as rents rise.

“There’ll be a retail migration to the second-best space,” said Lee, who estimates current mall rents to be about a third of street-level rents in the same area. “There needs to be a narrowing in the gap between the two, and this will be good for the landlords.”

Wharf rose 0.5 percent to HK$69.55 as of 10 a.m. local time today. The stock has risen 15 percent this year, compared with the 2.1 percent drop in the nine-member Hang Seng Property Index. Hysan gained 0.4 percent to HK$39.35, taking its gain for the year to 5.6 percent. Soundwill fell 1.5 percent to HK$19.80, trimming its advance in 2013 to 26 percent.

Accelerating Transformation

Hong Kong is now the most expensive place to buy a home among major global cities, after prices more than doubled in the past four years, according to Savills Plc. (SVS) That’s prompted government measures seeking to curb a property bubble.

The value of retail shop-ownership transactions rose 78 percent to HK$85 billion last year from 2011, extending a record, according to Centaline, which began collecting data in 1996.

While a retail boom and government curbs on the home market have shifted individual investors’ attention toward shops in busy areas such as Causeway Bay over the past three years, those funds are now starting to move into the fringe areas, according to Centaline’s Poon.

“So many individual investors have gone into these older areas to look for what they think are bargains, and that pushes up the prices a lot,” he said. ‘And, of course, after paying higher prices, they have to raise the rents.’’

That means the transformation of the fringe areas will continue to accelerate.

“Tai Hang used to be mostly just neighborhood eateries and craft shops,” said Chan of Benny Motors. “There’s no way we can afford to stay here now that there are all these high-end restaurants.”

To contact the reporter on this story: Kelvin Wong in Hong Kong at kwong40@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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