May 22 (Bloomberg) -- Soundwill Holdings Ltd. was forced to sell many of its properties as it battled to survive Hong Kong’s real estate crash in the late 1990s. Even after its stock plunged 99 percent and debt obligations loomed, it held on to a 40-story tower on a tucked-away street that today is the second-most expensive retail strip in the world.
Russell Street in the Causeway Bay district trails only New York’s Fifth Avenue in terms of average retail rents, fueled by mainland Chinese shoppers seeking tax-free Gucci handbags and Rolex watches. Shares of Soundwill are up more than sixfold since the beginning of 2009, the most among the 50 biggest developers listed in Hong Kong.
“We’ve always believed in the potential of Russell Street,” Victor Chan, a director of the company his parents founded three decades ago, said in an interview at its headquarters in Soundwill Plaza, the building with almost 20,000 square feet (1,860 square meters) of shopping space that the company refused to give up. “We’re in the right place at the right time. This place has helped us enormously.”
Hong Kong landlords such as Soundwill and Wharf Holdings Ltd. are benefitting as shoppers from other parts of China drive up retail sales, intensifying competition for stores. Average retail rents in the city may rise as much as 15 percent in 2012, according to broker Savills Plc. Average rents on Russell Street are $2,472 a square foot compared with $2,500 a square foot on New York’s Fifth Avenue, according to Cushman & Wakefield Inc.
Soundwill advanced 2.6 percent to HK$11.96 at the close of trading in Hong Kong. Wharf, which runs the 1 million-square-foot Times Square shopping mall opposite Soundwill Plaza, climbed 2.5 percent to HK$41.40, while Emperor International Holdings Ltd., another Russell Street landlord, rose 3.9 percent to HK$1.34. Hysan Development Co., the biggest landlord in Causeway Bay, fell 0.5 percent after rising as much as 1.3 percent.
Wharf has gained 90 percent since early 2009. Hysan has risen about 150 percent in the period, while Emperor has jumped 116 percent. The Hang Seng Property Index, which tracks the performance of the city’s seven-biggest developers and doesn’t include the landlords, has risen 28 percent in that time. The index advanced 1.6 percent today, compared with a 0.6 percent gain in the benchmark Hang Seng Index.
“Hong Kong is a first-class shopping mecca,” said Sigrid Zialcita, Singapore-based head of research for the Asia-Pacific region at broker Cushman. “I won’t be surprised if by the end of this year we see Causeway Bay exceeding the Fifth Avenue as a retail hub.”
Across Hong Kong, average retail rents have climbed for seven of the past eight years as fashion and luxury brands bet Chinese shoppers will keep up their consumption in the city, according to London-based Savills. Hong Kong and neighbor Macau are the only places in the country with no consumption taxes.
Visitors from the mainland rose 24 percent in 2011 from a year earlier to 28 million, or 67 percent of tourists to the city, according to Hong Kong Tourism Board statistics. Spending by all tourists rose 21 percent to HK$253 billion ($33 billion), the board said.
Even as China’s economic growth slows, a lack of new shopping space in Hong Kong will help support rents, said Joe Lin, senior director for retail services at broker CBRE Group Inc. Chinese Premier Wen Jiabao set a growth target of 7.5 percent this year, from an 8 percent goal in place since 2005.
“Supply of new space is still limited,” Lin said. “Many luxury and fashion brands are still very aggressive with their expansion plans and want to set up their flagship stores here.”
The Flying Winemaker
Demand for retail space in the Central district also is escalating. Inditex SA’s Zara, the Spanish clothing retailer, has agreed to lease a 55,000-square-foot shop on Queen’s Road Central, the main shopping street, for HK$11 million a month, the Ming Pao newspaper reported on April 16, citing unidentified people. The shop is currently occupied by Sweden’s Hennes & Mauritz AB, Europe’s second-largest clothing retailer, which is paying HK$5 million a month, according to the report.
Inditex-owned Massimo Dutti and Cos, a brand owned by H&M, are also opening shops along Queen’s Road Central, where watch shops and jewelers abound.
“High rents aside, tenants in Hong Kong have little bargaining power,” said Eddie McDougall, owner of the liquor seller the Flying Winemaker. McDougall opened his shop in November in Lan Kwai Fong, the bar and restaurant area near Central.
He spent almost six months looking for a shop. He said rents along Queen’s Road Central were too high, while mall operators such as the IFC put him on a one-year waiting list.
Retail sales at Causeway Bay’s Times Square, with tenants such as Alfred Dunhill and Vivienne Westwood, rose 24 percent in 2011 with full occupancy, Wharf said in its annual report.
Causeway Bay, a former fishing village on Hong Kong Island east of Central, gets another mall later this year with the opening of Hysan’s 710,000-square-foot Hysan Place.
Rent from Soundwill Plaza -- whose ground-floor tenants include watch-sellers Omega and Tag Heuer, and crystal-ornament maker Swarovski, while on the upper floors are high-end spa salons and a yoga studio -- accounted for a quarter of the company’s earnings in 2011, said Chan.
LVMH Moet Hennessy Louis Vuitton SA has agreed to pay HK$20 million a month to lease a ground-level shop in Times Square, Apple Daily reported in January.
Ground Floor Properties
Ground-floor retail rents in Hong Kong rose an average 5.23 percent in the first quarter from the previous three months, according to Colliers International. The Seattle-based broker expects rents to gain a further 12 percent in the next year.
Rents paid by Midland Holdings Ltd., Hong Kong’s biggest publicly traded realtor, for its more than 300 branches in the city rose 30 percent in 2011 from a year earlier, as rental accounted for 12.5 percent of its total costs, up from 9.7 percent, according to deputy chairman Angela Wong.
The influx of luxury brands is driving up retail real estate prices in nearby streets, making riches for some and squeezing out others.
Stephen Ho, the owner of a noodle restaurant on Sharp Street East, one block from Russell Street, last year sold the 1,000-square-foot shop for HK$100 million to a private investor.
“In the future, eateries in Hong Kong just can’t do business on the ground floor anymore,” Ho said. “Ground-floor properties will probably be used only for jewelry stores and high-end products. People from China come to buy those things.”
Lack of Space
Hong Kong and Tokyo have the lowest percentage of retail projects under construction among major cities in the Asia-Pacific region, according to New York-based Cushman. In Hong Kong’s three biggest shopping locations -- Causeway Bay, Central and Tsim Sha Tsui, on the southern tip of Kowloon peninsula -- new supply of retail space is limited because of a shortage of land available for development, said Cushman’s Zialcita.
Hong Kong’s competitiveness as a retail center may be tarnished as international brands get frustrated by the lack of space or driven away by high rents, according Helen Mak, head of retail services at Colliers.
“If brands can’t find space here they will go to other places like Singapore or even Shenzhen,” said Mak, referring to the southern Chinese city across the border from Hong Kong. “There are obviously signs of demand and supply imbalance here and they’re getting worse.”
Adding More Space
Soundwill will in the next three years add at least two more retail and office complexes in Causeway Bay, almost doubling its retail and office footprint in the area, according to Chan. It is also building a 190-unit luxury apartment complex in the district.
The company, which started by buying rundown old buildings before reselling or redeveloping them, plunged from HK$180.21 in August 1997 to 95.8 Hong Kong cents in February 2003 as the Asian financial crisis, dot-com bust and the SARS epidemic meant it couldn’t find enough buyers for its properties after it had taken on too many projects, Chan said.
The company began turning around in 2003, when it became profitable again and paid its first dividend since 1997. Wharf shares have more than tripled since the start of 2003, while Hysan’s have surged fivefold.
“We’ve positioned ourselves at the heart of Causeway Bay,” said Soundwill’s Chan. “If you’re already in the best industry and the best spot, what can you do about it when the market really goes the other way?”
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