Chow Tai Fook Seeks 20% Drop in Hong Kong Shop Rents in 2015

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Chow Tai Fook Jewellery Store
An employee assists customers inside a Chow Tai Fook Jewellery Group Ltd. jewelry store in the Central district of Hong Kong. Photographer: Billy H.C. Kwok/Bloomberg

Chow Tai Fook Jewellery Group Ltd. is seeking a 20 percent reduction in rent for some of its stores in Hong Kong when contracts come up for renewal this year, as sales of luxury items plunged in the city.

The company has already obtained rent cuts of between 10 percent and 20 percent so far this year, compared to the previous contracts for some stores, Managing Director Kent Wong said, without quantifying the number of shops. About 30 of its outlets in Hong Kong will come up for renewal in 2015, he said.

This year is a “very special year that we can negotiate with the landlord,” Wong said in an interview in Hong Kong on May 8. “We are demand driven; we expect we can have a 20 percent rental reduction.”

Hong Kong’s retail rents are falling as China’s slowing economy and its clampdown on corruption and extravagance crimped consumer spending. Wealthy Chinese tourists also chose other travel destinations. The city saw the first monthly drop in visitors since June 2009 in March, when sales of jewellery, watches and clocks also fell for the sixth straight month.

Chow Tai Fook’s same-store sales in Hong Kong, Macau and other markets dropped 26 percent in the three months ended March from a year earlier, dropping for a fifth quarter. The company may shut down one or two stores in Hong Kong this year, including a branch on the Peak, Wong said.

Shares of Chow Tai Fook fell 0.2 percent to HK$9.32 at 10:25 a.m. in Hong Kong trading.

Room for Reductions

“Rents of prime retail locations in Hong Kong are generally more sticky in nature,” said Catherine Lim, an analyst at Bloomberg Intelligence in Singapore. “These are still desirable locations for brand building purposes for the retailer. Rents of non-prime locations, especially street-level shops, may have more room for deductions.”

Chow Tai Fook, the world’s largest listed jeweler, has about 90 points of sales in Hong Kong with almost half of receipts coming from Mongkok and Tsim Sha Tsui,popular shopping districts among Chinese tourists.

Economists at Daiwa Capital Markets forecast retail sales in Hong Kong to fall by 4 percent in value this year from 2014.

Retail rents in the city’s top-four shopping locations have dropped 3.5 percent quarter-on-quarter in the first three months of this year,according to a Colliers International report last month. It predicts the rents of street-level shops to fall another 9 percent in 2015, with more vacant shops becoming available.

Overseas Chinese

While the company has no plans to expand in Hong Kong this year, Wong hasn’t ruled out the possibility of opening a store if they can find a prime location with good rental terms.

The company is considering having more points of sales in duty-free shops in South Korea to capture high-spending mainland Chinese tourists after opening its first store in September,Wong said.

Hong Kong’s protests against mainland tourists may divert more Chinese to Korea and other destinations, Nomura Holdings Inc. analyst Cara Song wrote in April.

The growth in mainland travelers will be halved to 8 percent this year, according to the Hong Kong Tourism Board. Korea sees Chinese arrivals increasing 18 percent this year, according to Bloomberg Intelligence.

Wong, who joined Chow Tai Fook in 1977, said Hong Kong’s retail market will recover gradually in the second half of this year.

“The market in general needs six months to one year to restructure the product mix catering to the changing taste of customers,” he said. “We remain optimistic about Hong Kong in the mid- to long-term.”

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