Hong Kong Malls That People Can't Avoid Attract Goldman, PumaBy
Community malls serving daily needs outperform top-end centres
Gaw, Goldman’s $2.9 billion regional-mall buy highlights shift
Forget Gucci and Rolex. Grocery stores, hair salons and tutoring centers may have the brightest future for Hong Kong retail as high-end malls get squeezed by forces beyond their control.
That’s according to property consultants including Savills Plc, Jones Lang LaSalle Inc. and CBRE Group Inc., who say that community shopping centers targeting local customers are better suited to weather a downturn that has battered luxury retailers. In Hong Kong’s biggest deal involving malls this this year, Gaw Capital Partners led a group including Goldman Sachs Group Inc. in a $2.9 billion purchase of 17 shopping centers located below public housing estates, where residents walk through the malls to get to their homes.
These regional malls are unique to Hong Kong, a densely populated city where space is scarce and apartments are often stacked on top of shopping centers, restaurants and offices. While most of these shopping centers are dominated by local retailers and family-run stores, some larger brands such as Puma, Uniqlo and Giordano have moved in, attracted by a model that insulates them from the whims of mainland Chinese tourists and competition from online shopping.
“Traditional retail is facing a lot of threat from e-commerce,” said Goodwin Gaw, chairman of the private equity company that bears his name. The malls his firm bought “are community centers and an asset class that doesn’t exist anywhere else in the world, where you have podiums with 30,000 people living above them.”
During an almost three-year retail downturn that saw sales in Hong Kong fall more than 11 percent, regional malls have fared better than their counterparts in prime locations. According to Jones Lang LaSalle, base rents for second-tier malls have edged up 0.2 percent since 2016, while rents at tier-one malls have fallen 1.6 percent in the same period.
“These malls are anchored around local communities and are consistent-yield-driven investments,” said Simon Smith, senior director research for the Asia-Pacific region at Savills. “Necessity-shopping is pretty much bullet-proof during a downturn, it’s the discretionary spending and luxury that get hit the hardest.”
The Gaw purchase from Link Real Estate Investment Trust comes as malls worldwide fight the wave of online retail, leading to greater consolidation in the industry to provide bigger centers that give consumers a reason to visit. The latest example: the $15.8 billion purchase by Unibail-Rodamco SE of Australia’s Westfield Corp. in the biggest property acquisition since 2013.
Ada Wong, chief executive officer of Champion Real Estate Investment Trust, says local shoppers are key to the success of its Langham Place mall in the densely-populated Kowloon district of Mongkok. She is expecting high single-digit sales growth in the last two months of the year, thanks to new tenants including Lego, Adidas and Line, the Korean messaging service whose online stickers have spawned an offline business in toys.
“We are very resilient,” Wong said. “If a brand doesn’t want to pay high base rent but has high turnover, it’s good for the mall.”
Neighborhood malls built by private developers as part of large residential complexes are also seeing more interest from international retailers. At Sun Hung Kai Properties Ltd.’s YOHO Mall in Yuen Long, brands including Clarins, Uniqlo and Rabeanco handbags are moving in, said Jessica Wong, a real estate agency deputy manager for leasing.
“Retailers are looking for this kind of opportunity to expand their footprint. which is no longer limited to central business districts,” said Joe Lin, executive director of retail services for Hong Kong at CBRE.
To be sure, there is less upside for regional shopping centers during good times. Before a crackdown in China on conspicuous consumption in the past few years, mainland tourists would line up to shop at the likes of Prada, Gucci and Tiffany, and leave laden with luxury handbags and watches costing thousands of dollars.
“These are low-beta shopping malls,” said Cusson Leung, managing director and head of Hong Kong property and conglomerates research at JPMorgan Chase & Co. “When the retail market isn’t doing too well, they won’t do too poorly because they sell lower level stuff or necessities. In an upswing there isn’t as much upside for the landlords.”
The 17 malls bought by Gaw are a legacy of Hong Kong’s so-called New Towns policy to encourage people to move to the suburbs, connected to the rest of the city by extensive public transport systems.
“They are like a labyrinth,” said Gaw. “It’s incredible to see, you don’t have a choice and have to pass through them.”