Hong Kong Rents Hurt by China Tourist Curbs: Real Estate

Jiao Jun, visiting Hong Kong from Shanghai with his wife Creasey Xia for the first time, is not feeling welcome.

“The people here have such a bad attitude toward us,” the 25-year-old logistics worker, in Hong Kong on a two-day trip last week, said while shopping for gold jewelry in the Causeway Bay district, home to the world’s most-expensive retail street. “I don’t know why. We’re spending and driving their economy.”

Rising tensions between local residents and the tens of millions of tourists who flock across the border pulling rolling suitcases and fill the city’s subway each year have prompted Chief Executive Leung Chun-ying to consider limiting their arrivals. The move could cost Hong Kong as much as HK$25 billion ($3.2 billion) in retail sales, according to Goldman Sachs Group Inc. It also could spark a drop of as much as 10 percent in rents for shops, according to CBRE Group Inc. The city’s landlords, such as Wharf Holdings Ltd. and Hysan Development Co., may suffer as well.

“Retailers have already become more cautious on their expansion plans in Hong Kong” with the recent slowdown, said Joe Lin, executive director of Hong Kong retail services at property brokerage CBRE Group Inc. “What the chief executive has said will cause even more worry.”

Curbing visitors to the former British colony from mainland China, who account for as much as half of retail spending in some malls, would be a double blow to the city’s landlords.

Retail sales in March fell for the first time since 2009 and declined 9.5 percent in April as Chinese consumers, facing slowing economic growth at home, shift their spending to daily necessities such as medicine and food from luxury bags and jewelry. Sales of jewelry, watches and luxury gifts plunged 40 percent in April from a year earlier, the most since October 2004, according to Hong Kong government data released today.

Damping Rents

Shop rents on first-tier streets may be limited at 5 percent growth this year and those in fringe locations could fall as much as 10 percent, CBRE said in a first-quarter review. If fewer mainland visitors are allowed into Hong Kong, prime-street rents may stagnate, or even drop slightly, and secondary street rents may widen their decline to 15 percent, according to CBRE’s Lin.

Retail street rents in prime Hong Kong shopping precincts fell 2.2 percent in 2013, according to Savills Plc. Average rents in Hong Kong’s main shopping districts may decline 5 percent in the next 12 months, property broker Colliers International said earlier this month.

Causeway Bay was ranked the world’s most expensive shopping location for rents in 2013, ahead of New York’s Fifth Avenue, according to data from Cushman & Wakefield Inc. It costs retailers $3,017 a square foot in the district, an increase of 15 percent from 2012, data show.

Falling Spending

Prada agreed to lease a shop on Russell Street, in Causeway Bay, for HK$9 million a month, while Chow Tai Fook will reportedly rent a shop on Canton Road in Tsim Sha Tsui for almost HK$2,900 per square foot, more than 2.5 times the rent paid by the previous tenant, according to Cushman & Wakefield’s third-quarter 2013 review report.

Swedish retailer Hennes & Mauritz AB leased 46,000 square feet in Hang Lung Center in Causeway Bay for about HK$10 million a month, according to CBRE.

The last time prime-street shop rents fell on an annual basis was in 2003, when they declined 3 percent, according to Savills. Average rents have almost quadrupled over the decade through the end of last year, according to the broker, after Hong Kong’s government in 2003 allowed individual mainland visitors into the city to boost an ailing economy.

Fewer Tourists

The number of tourist arrivals from the mainland has been increasing “rather rapidly” in the past few years and “has exerted pressure on certain facilities” as well as some neighborhoods, the chief executive told reporters on May 27. “Therefore, the Hong Kong government has been listening to views of various sectors and has been communicating with the central authorities.”

Leung sought advice on the consequences if Hong Kong cuts visas to mainland visitors by 20 percent, Hong Kong Economic Times, a Chinese-language newspaper, reported the same day, citing his speech at a closed-door meeting a day earlier.

A reduction of that magnitude in mainland arrivals would probably mean almost a 5 percent cut in total retail sales, according to Savills.

Harbour City

“We’d be looking at a greater impact on prime shopping malls and core retail districts where the spending currently focuses,” said Simon Smith, senior director of research and consultancy at the London-based brokerage.

Mall owners such as Wharf, Hysan and Sunlight Real Estate Investment Trust may be hurt by a drop in mainland tourist spending, Macquarie Group Ltd. said in a May 27 report.

Wharf, which owns two of the most popular malls among mainland shoppers, was cut to neutral from buy by Bank of America Corp.’s Merrill Lynch & Co. unit last week. Wharf’s shares were down 8.1 percent this year to May 30, the second-worst performer in the Hang Seng Property Index, which tracks the stocks of nine developers and was up 3.2 percent in the same period.

Mainland tourist spending accounts for 50 percent of the sales at Wharf’s Harbour City mall in the Tsim Sha Tsui district and as much as 40 percent of revenue at its Times Square shopping center in Causeway Bay, Merrill Lynch analysts, led by Karl Choi, wrote in a May 27 note. Retail sales at these malls could drop 8 percent to 10 percent in the worst-case scenario, they said.

Catherine Fu, a spokeswoman for Wharf, controlled by the family of billionaire Peter Woo, declined to comment. Wharf shares fell 0.8 percent to HK$54.45 at the close of trading in Hong Kong.

Balanced Mix

Hysan, operator of its namesake mall, is among companies with the most earnings at risk, Macquarie analysts wrote in a May 27 report.

“We have a portfolio of balanced tenant mix, with different price points catering to all types of customers,” Hysan said in an e-mailed response to questions. “We also do not have a reliance on any group, be they local shoppers or visitors.”

Hysan’s shares are up 14 percent this year. While average street rents are projected to fall, leasing space in shopping centers may continue to get more expensive as retailers prefer the malls’ management and mix of tenants, according to Savills. Average rents in major shopping centers rose 1.7 percent in the first quarter after gaining 9.1 percent last year, according to the broker. Hysan declined 5.4 percent to HK$35.90 today, the biggest decline since May 2012.

Gold Jewelry

Swire Properties Ltd., operator of three malls including Pacific Place in the Admiralty district, derives as much as 40 percent of its sales from mainland visitors, according to a Merrill Lynch report on May 8.

“Imposing tourist restrictions will have an impact that goes beyond retail and service sectors,” Swire Properties said in a statement in response to questions about the proposed change.

Swire Properties shares have risen 26 percent this year. The stock rose 2.3 percent to HK$24.75 today.

Chinese buyers have been propping up the city’s retail sales and rents since July 2003, when Hong Kong started allowing visitors from selected mainland cities on an individual basis as a way to stimulate the economy after Hong Kong was hit by the severe acute respiratory syndrome, known as SARS. From 2009, residents of Shenzhen, the southern city bordering Hong Kong, were able to apply for multiple-entry permits, boosting the number of same-day visitors.

Visitors from the mainland accounted for 75 percent of Hong Kong’s 54.3 million arrivals in 2013, according to the Tourism Commission. Total arrivals jumped 12 percent last year, the fourth consecutive year of double-digit gains.

Slowing Arrivals

Hong Kong’s tourist arrivals would slow even without any policy measures, CBRE’s Lin said, pointing to a drop in mainland visitors during the Labor Day holiday in May, traditionally a time of travel and shopping for the Chinese. That contrasts with year-over-year growth just seven months ago during the October break, known as Golden Week.

“If this proposal was raised a year or two ago, the government may have been able to achieve what it wanted, but now it’s too late,” Lin said. “The consequences of such a move might exacerbate a situation that’s already deteriorating.”

Jiao and Xia, the couple from Shanghai, said they planned to spend as much as 30,000 yuan ($4,800) during their trip. It’s still cheaper to shop in Hong Kong because of the weaker Hong Kong dollar against the yuan, Xia said, holding a small burgundy shopping bag from Chow Tai Fook, the world’s largest jewelry chain.

“We’ll just go about our own business,” Jiao said, when asked if he and his wife will come back to Hong Kong. “Our friend came from Shenzhen to spend the day with us yesterday. She hates coming here.”

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