Day-Trippers Underpin Hong Kong Mall Rents: Real EstateKelvin Wong
Jane Hu, a financial adviser from the Southern Chinese city of Huizhou, travels to the outskirts of Hong Kong to shop with her friends at least once a month. They rarely venture into the city center or stay overnight.
“It’s only a two-hour bus ride so we’re not wasting our money on hotels,” said Hu, 30, hauling around a suitcase stuffed with pharmaceutical drugs and snacks she bought in the New Town Plaza shopping mall in the Sha Tin district, about 16 miles (26 kilometers) from Hong Kong’s border with mainland China. “These are like grocery-shopping trips.”
Mainland Chinese like Hu, taking day trips in search of basic goods, are helping boost retail rents in the New Territories, the biggest of Hong Kong’s three main regions, according to broker Savills Plc. Companies such as Sun Hung Kai Properties Ltd. and Link Real Estate Investment Trust, which run malls in areas outside the city’s most-expensive retail districts, are set to benefit amid a slowdown in the world’s second-largest economy, BNP Paribas SA said.
“There’s a major shift in spending patterns among Chinese travelers,” said Simon Smith, senior director of Asia-Pacific research at London-based Savills. The areas closer to the Chinese border “are probably where the headroom is in terms of rental growth this year.”
Rents at malls on the city’s outskirts, which can be as low as a 10th of those in the city center’s, are expected to grow as much as 10 percent this year, according to Savills. Rents of street-level shops in prime shopping districts in Hong Kong will probably remain flat, while those in prime-location malls will gain about 5 percent.
A total of 18.8 million mainland tourists visited Hong Kong, a special administrative region of China with a separate legal system and autonomy over issues such as food standards, in the first half, up 20 percent from a year earlier, according to the Tourism Board. Among them, single-day visitors rose 24 percent to 11 million, outpacing the 16 percent gain in those staying overnight.
The New Territories, which covers more than 85 percent of Hong Kong, is made up of mostly farming villages and towns linked by railway and highways. They were developed by the government in phases over the past three decades to accommodate the expanding population.
The area is home to about half of Hong Kong’s 7 million people and is projected to post the biggest population growth in the decade ending 2019, topping Hong Kong Island and Kowloon, government statistics show.
Rents at malls in New Territories average about HK$80 ($10) to HK$250 per square foot a month, according to Savills. That compares with HK$1,000 to HK$2,000 for prime shopping district street shops, and HK$500 to HK$700 at high-end shopping malls, the broker said.
Wealthy Chinese tourists shopping for expensive goods, including jewelry and watches, have helped Hong Kong prime street rents outpace those in the fringe areas over the past decade. Average rents on Hong Kong Island gained about 45 percent in 2011 and 2012, more than double the growth in the New Territories, according to Savills. Prime refers to the most stable high-income producing properties.
That trend is starting to change, as China’s President Xi Jinping clamps down on luxury gifting among government officials and as the country’s economy is set to grow at the slowest pace in almost two decades.
New Town Plaza, where Hu did her shopping, was built by Sun Hung Kai, the city’s biggest developer by market value, in 1985. Of the 20 malls it operates in the city, 13 are in the New Territories, according to the company’s website.
“It’s a good time for those with large portfolios in these fringe areas,” said Patrick Wong, Hong Kong-based analyst at BNP Paribas.
Link REIT, the city’s biggest property trust, and Sino Land Co. are also among real estate companies best placed to take advantage of the trend because of their network of shopping malls on the outskirts, Wong said.
More than a third of the 51 shopping malls owned by Sino Land, which makes almost all its earnings in Hong Kong, are in the New Territories, according to its website. Ivan Yau, a spokesman at Sino Land, declined to comment on the outlook for its malls in the area.
International fashion brands such as Inditex SA’s Zara and Hennes & Mauritz AB are expanding in the north to lure shoppers from China, according to Jeanette Chan, Hong Kong-based regional director for retail at property broker Jones Lang LaSalle Inc.
Victoria’s Secret, the Columbus, Ohio-based lingerie chain known for its supermodels called “Angels,” this year opened one of its first two stores in the city at New Town Plaza.
“It’s only very recently that brands of such caliber would consider opening in these areas,” said Chan, adding that landlords are now investing more to renovate malls on the city’s outskirts to draw international fashion tenants.
High-end luxury fashion brands such as Gucci, Louis Vuitton and Chanel, electronic-gadget stores and upmarket restaurants dominate most of Hong Kong Island’s shopping centers, including the IFC Mall in Central and Causeway Bay’s Times Square. Most malls in the New Territories are filled with shops selling skin-care, health and beauty and baby products, restaurant chains and independent fashion boutiques catering to mass-market shoppers.
That maybe about to change. Sun Hung Kai invested HK$280 million in 2009 to renovate a 600,000-square-foot shopping mall in Tsuen Wan, a largely working- and middle-class area in the west of the New Territories, Brenda Wong, a Hong Kong-based spokeswoman at the developer, said. It is also planning a HK$360 million facelift of another mall, Sun Yuen Long Centre, in the city’s northern Yuen Long district, she said.
Since its 2005 listing, Link REIT has completed renovations of 30 shopping malls for HK$2.68 billion, while another 26 projects are either under way or being planned with an estimated cost of more than HK$3 billion, according to its annual report published in March. The trust owns 182 retail and carpark properties mostly in Kowloon and the New Territories.
“We’re seeing many second-tier international brands opening shops in our malls over the past few years,” Hubert Chak, finance director at Link REIT, said in an interview. “Some of the renovations are done simply because of demand from our tenants.”
Landlords such as Swire Properties Ltd. and Soundwill Holdings Ltd., which run malls in prime areas on Hong Kong Island, where the city’s main financial district and most expensive residential areas are located, are feeling the pressure, BNP Paribas’s Wong said.
Shares of Soundwill, one of the biggest retail landlords on Russell Street in the Causeway Bay area, declined 31 percent over the past six months, compared with the 5.5 percent loss in the Hang Seng Property Index, which tracks nine of the biggest developers in the city, including Sun Hung Kai and Cheung Kong Holdings Ltd.
Russell Street overtook New York’s Fifth Avenue as the world’s most expensive shopping strip in 2012, according to Savills.
Candy Yeung, a Hong Kong-based spokeswoman at Soundwill, declined to comment.
Swire Properties, which in August reported first-half profit that missed analysts’ estimate as retail rent growth slowed, has fallen 22 percent in the past six months. The developer manages Pacific Place, a luxury shopping mall near the Central business district.
Slowing retail growth “was partly because of the changed tenant mix as it takes time for new tenants to settle in, as well as may major tenants’ renovation,” Elizabeth Kok, retail portfolio director at Swire Properties, said in an e-mail.
Swire Properties’ shares were unchanged at HK$22.10 at the the close of trading in Hong Kong today, while Soundwill was also unchanged at HK$15.16.
Not all are convinced that growth in fringe-area rental will outperform the city’s prime shopping districts comprised of Central and Causeway Bay on Hong Kong Island, and Tsim Sha Tsui and Mong Kok across Victoria Harbour on the Kowloon Peninsula.
“Same-day travelers have been coming here along with the luxury shoppers for a while,” Joe Lin, Hong Kong-based senior director for retail services at CBRE Group Inc., said. “There’s a bit of a slowdown in luxury shopping, but it is still growing. At the same time, I don’t see a big boom of same-day travelers. It’ll be steady.”
Lin forecasts prime street rents to grow 4 percent in the second half, matching the growth in the first half.
Many mainland Chinese visit Hong Kong regularly to purchase sundry goods such as soap, cosmetics and diapers as well as food including milk powder because of lower prices and quality concerns at home. The Hong Kong government this year restricted outbound travelers to two cans of formula milk following complaints of a shortage for local babies.
“The malls in Hong Kong are nicer to walk around and the quality of the products are more reliable,” said the Chinese stock-broker Hu. “We’ll keep coming back.”