Feb. 16 (Bloomberg) -- Retailers from Forever 21 Inc. to Gap Inc. have rushed to Hong Kong to reach the 28 million Chinese tourists passing through last year. To do so, they are paying some of the world's highest rents.
Hong Kong retail rents, which rose 32 percent in prime locations last year according to Savills Plc estimates, may climb more even as global economies and property markets slow. That may make marketing to Chinese teenagers in Hong Kong’s Causeway Bay as expensive -- or even more -- than a storefront in New York’s Times Square.
Forever 21, which opened its first Hong Kong store in January, said it is paying $1.4 million a month -- its highest rent in the world, both in total terms and per square foot. It pays less in New York’s Times Square.
“Hong Kong is the gateway to China; we feel it is important to establish our brand within China,” said Larry Meyer, executive vice president of closely held, U.S.-based Forever 21.
Rents of $1,943 per square foot in Hong Kong’s Causeway Bay make it the second most expensive shopping street in the world in 2011, behind Fifth Avenue’s $2,250 and topping Tokyo’s Ginza, London’s Bond Street and the Champs Elysees in Paris, according to Cushman & Wakefield, a New York-based real estate services firm.
The most tenacious retailers, such as San Francisco-based Gap, Abercrombie & Fitch Co. and Forever 21, are willing to pay for face time with Chinese tourists. Others, like Esprit Holdings Ltd., which is trying to revive global profits, have been forced to shut some Hong Kong stores.
First Gap Store
There are often long lines of Chinese tourists outside Louis Vuitton, Burberry and Gucci stores on Tsim Sha Tsui’s Canton Road in the Kowloon peninsula.
Jeans and T-shirt maker Gap in November opened its first Hong Kong store in the Central financial district. Louise Callagy, a spokeswoman for the company, wouldn’t comment on the rent.
The store is a “good investment,” Jeff Kirwan, Gap’s managing director for Greater China, said in an interview in Shanghai.
“We put aside a budget, and when we think about the returns we need, we’re exceeding that,” he said. “Hong Kong is expensive, and so is Manhattan, and so is Shanghai.”
Burberry Group Plc, the U.K.’s largest luxury-goods maker, is planning to pay HK$6.5 million ($840,000), or 250 percent more than the last tenant, for a 5,200-square-foot space in Causeway Bay, Hong Kong Economic Times reported. George Prassas, London-based spokesman of Burberry, declined to comment on the report.
Hong Kong retail sales grew 25 percent in 2011 from a year earlier, driven by mainland Chinese travelers snapping up luxury and retail goods, according to government data.
“The rent in Hong Kong leads that of London or New York,” said Nick Bradstreet, head of leasing at Savills, a property agency. “The higher the sales, the higher the rent.”
He expects overall retail rents on prime Hong Kong streets to rise 15 percent in 2012 after 32 percent growth in 2011.
Urban land is scarce in densely populated Hong Kong, which has a population of 7 million and where less than 25 percent of the land is developed.
The high rent is pushing out some local and global retailers. Well-known brand Shanghai Tang, which is owned by Cie. Financiere Richemont SA and sells Chinese-style outfits, in October left the Hong Kong premise that housed its flagship store for 17 years after the monthly rent “went totally out of control” from the HK$3 million it had been paying.
The company will move in March to a 20,000 square-foot, four-story building -- to be called Shanghai Tang Mansion -- about 320 meters (1,050 feet) from its old store, Raphael le Masne de Chermont, the brand’s executive chairman, said in an interview with Bloomberg News in October.
The old space of Shanghai Tang, founded by Hong Kong businessman David Tang, was picked up by New Albany, Ohio-based Abercrombie & Fitch.
“Brands like Abercrombie consider it essential to be visible in Hong Kong because of the awareness and the traffic of mainlanders,” said Erwan Rambourg, head of consumer & retail research at HSBC. “It’s important for them to make a statement. Profitability is not the main target. It’s essentially a PR advertising approach rather than a profitability approach.”
Foreign retailers, such as Forever 21, said they are in Hong Kong for the long haul.
“We paid up,” Forever 21’s Meyer said in a Bloomberg Television interview. “We are optimistic that we will get good sales, profitable sales on the store.”
They face some challenges. Hong Kong retail growth is likely to slow to 15 percent this year from 25 percent in 2011, according to Caroline Mak, chairwoman of the Hong Kong Retail Management Association.
This year “is going to be a crucial moment to test the foreign retailers’ stamina and their commitment in China markets,” said Eddie Lau, head of regional consumer research at Citigroup Inc. “Unless they are very bullish on long-term growth and are prepared to invest heavily, we might see them pulling out. Sales growth is likely to slow while operating expenses remain incredibly high in the near term.”
Esprit, the clothing retailer that saw global profits plunge 98 percent in last fiscal year, is set to shut three of its Hong Kong’s stores in the city’s most sought-after shopping spaces this year. Esprit doesn’t want to pay “crazy prices” in rent to renew the contracts, said Patrick Lau, a company spokesman. The company is still committed to Hong Kong and China, he said.
Inditex SA’s Zara may rent a Hong Kong store being vacated by Esprit for HK$3.5 million a month, Hong Kong publication Apple Daily reported in February. Esprit currently pays a monthly rental of HK$1.62 million, the Chinese-language newspaper said, without saying where it got the information from. Zara didn’t comment.
“We forecast another strong year for retail rental market in Hong Kong mainly due to excessive demand,” said Richard Kirke, managing director of real estate company Colliers in Hong Kong. “Given its size, Hong Kong always faces a supply constraint.”
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