Hysan Sees Rental Growth at Hong Kong Malls Even as Retail Slows

Hysan Development Co., the biggest commercial landlord in the world’s costliest area for shop leases, expects to raise rents at its malls even as Hong Kong’s retail sales drop.

“We will definitely be able to achieve double-digit growth” in rents for leases expiring next year, Chief Executive Officer Lau Siu-chuen said, adding that most will be in the company’s newest mall, Hysan Place, in Causeway Bay. “Our rental is pretty firm across the board.”

Mall operators are faring better than street-level shops as Hong Kong’s retail sales shrink amid China’s slowing economic growth and anti-extravagance measures. Street-shop rents in Causeway Bay fell 3.5 percent in the second quarter as vacancies rose, while major shopping centers posted 1.7 percent quarter-on-quarter growth, according to Savills Plc.

If retail sales extend declines, “I expect rents in less prominent locations will continue to soften,” Lau said in an Aug. 12 interview. “Selecting a location is becoming more important for retailers. Even within Causeway Bay, there’s a big differentiation.”

Hong Kong’s retail sales dropped for five straight months through June. The city’s economic growth slowed in the second quarter as tourist spending on jewelry and watches plunged, Financial Secretary John Tsang wrote in a Aug. 10 post on his government blog. The numbers will be released tomorrow.

Lease Talks

Hysan, which owns about 3.4 million square feet of office and retail space in the area east of the Central business district, raised average rents by about 60 percent in the first half of the year, the Hong Kong-based company said in its interim results on Aug. 8. Next year’s lease negotiations may not match that pace of increase, Lau said in the interview.

The company has room to raise rents as occupancy costs for its tenants are at about 14 percent and spot rents at its malls are as much as 30 percent lower than those at Times Square, the Causeway Bay mall owned by Wharf Holdings Ltd., UBS AG analysts Eugene Cheung and Eva Lee said in an Aug. 8 report.

Times Square’s average monthly retail rent is HK$249 ($32) a square foot, according to a presentation from Wharf.

Hysan shares have risen 14 percent this year, compared with the 6.7 percent gain in the benchmark Hang Seng Index.

Luxury Hub

The company is revamping its Lee Gardens luxury retail hub in Causeway Bay ahead of a new shopping and office complex opening across the street in 2018. Luxury retail space will likely make up about a quarter of the new project, estimated to cost as much as HK$2.5 billion, and the rest will be offices, Lau said. Plans have yet to be finalized, he said.

Prime street retail rents in Hong Kong were about $4,334 per square foot annually as of the end of last year, 31 percent higher than in New York and more than double that in Paris, according to a February report from CBRE Group Inc.

Rents in secondary locations are expected to fall as much as 15 percent this year as retailers remain cautious, the realtor said in a second-quarter review report.

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