Hong Kong landlords brace for even deeper cuts to retail rents

Shop rents in Hong Kong fell last quarter to the lowest since Cushman & Wakefield started recording the data in 2008. PHOTO: AFP

HONG KONG (BLOOMBERG) - Hong Kong's retail landlords are bracing for a further squeeze on the lowest rents in more than a decade as tenants seek relief in the aftermath of the city's worst Covid-19 outbreak.

Some tenants have already started renegotiating leases by exercising bargaining power ahead of a proposed law that will allow a moratorium on payments. Government pressure and the need to keep retailers' businesses afloat have also prompted property owners to offer discounts, analysts say.

Tenants "have these excuses to negotiate lower rents", said Mr Lieman Leung, a director at property agency Midland IC&I. Landlords have had to cut rents by about 30 per cent in many cases, while some businesses most affected by the pandemic, such as luxury goods retailers, have been getting a 50 per cent discount, he said.

Owners of malls and street shops are struggling to get rents back to pre-pandemic levels that made Hong Kong one of the world's most expensive markets. This is hurting a key source of income for developers at a time when the residential and office sectors are also under pressure following the government's strict response to the health crisis.

Lawmakers are expected to pass a Bill as soon as this month that will give tenants a three-month grace period on rental payments after Covid-19 restrictions left stores shut or deserted and caused retail sales to plunge. Those that renew rents will not be subject to the relief, giving them leverage to ask landlords for discounts instead.

Shop rents in Hong Kong fell last quarter to the lowest since Cushman & Wakefield started recording the data in 2008. Causeway Bay led the declines in the most popular districts, with a 4.5 per cent drop. The vacancy rate in key locations rose to 11 per cent in March, the highest in a year, data from Midland IC&I show.

The rental enforcement moratorium Bill is aimed at preventing landlords from terminating leases or taking legal action against tenants in certain sectors for failing to pay rent on time. The relief would be valid for three months. Lawmakers are scheduled to debate the proposed law on April 27 and may approve it on the same day.

Developers are unhappy with the plan. Landlords have already been cutting rents for small and medium-sized businesses, and the moratorium would only add more pressure on property firms, according to Mr Stewart Leung, chairman of the Real Estate Developers Association of Hong Kong's executive committee.

"It will be difficult for some of our members," Mr Leung said in an interview. Landlords would have to bear the risk of losing three months of rent if the tenants shut their businesses after the policy expires, he said.

Swire Properties and Link Reit said in February that they would provide rental concessions to businesses that had to close under the government's order. New World Development has also adjusted rents for specific tenants based on their situations, chief executive officer Adrian Cheng said in the same month.

Landlords' earnings will be hurt by such discounts as well as smaller turnover rents - those tied to tenants' revenues - following the drop in retail sales, according to Mr Patrick Wong, an analyst at Bloomberg Intelligence.

For their part, retailers say real estate owners are not doing enough. A March survey by trade group Hong Kong Retail Management Association found that 62 per cent of mall owners did not offer any rental relief. The association has urged landlords to help them get through the pandemic.

While the government's latest round of consumption vouchers distributed in early April are set to boost retail sales in the city, they may not be enough to lift all businesses out of their misery.

Little help

Vouchers offer little help to small retailers, said Ms Rita Wan, who runs a small fashion boutique in the New Territories. "Customers don't come to us when they have that extra money to spend," she said, adding that they tend to use it at big electrical appliance stores or supermarket chains instead.

Ms Wan said her landlord, a listed real estate company, was willing to cut her shop's rent for February. But she has not received confirmation that the concessions will continue.

"We understand that it is not a corporation's obligation to lower rents for us," she said. "But they also raise the rents when the market is doing well, so why not cut them when the situation is bad?"

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