Hong Kong landlords face tough times as protests sink rents

The skyline of Hong Kong seen in a photo taken on Oct 18, 2019.
The skyline of Hong Kong seen in a photo taken on Oct 18, 2019.PHOTO: REUTERS

HONG KONG (BLOOMBERG) - Landlords in Hong Kong, a city with some of the highest commercial rents in the world, are staring down the barrel of a tough year.

Anti-government protests that started in mid-2019 have taken their toll on shop and office owners. Large-scale protests in popular shopping districts and a slump in tourists have made it increasingly difficult for retailers.

According to the Hong Kong Retail Management Association, more than 5,600 jobs could be lost and thousands of stores may shut over the coming six months. That's already impacted the value of retail-leasing transactions, which dropped 26 per cent in the second half versus the same period of 2018, data from Centaline Property Agency show.

"Retailers have become very cautious," said Marcos Chan, head of research for Hong Kong at CBRE Group. "There won't be many expansions in the coming year."

International brands have been scaling back their operations since the protests began in June. Luxury fashion label Prada decided not to renew its largest store in the Causeway Bay area in August, the South China Morning Post reported. The landlord later slashed the rent by 44 per cent to entice tenants.

Folli Follie, a brand of Greek firm FF Group, closed one of its shops in Central in December ahead of the lease's expiration and the asking price has since been chopped by 40 per cent. LVMH, the world's largest luxury conglomerate, plans to close a Times Square mall store in Causeway Bay after its request for lower rent was refused.

A slump in shop rents could threaten the city's status as the world's priciest retail-rental market. Causeway Bay had the highest rents in the world in the third quarter, at US$2,544 per square foot a year, figures from Cushman & Wakefield Plc show.

OFFICE DOWNCYCLE

Knight Frank estimates rental costs for street shops in prime shopping areas will decline by 15 per cent or more in 2020 as a result of ongoing social unrest.

 
 
 
 

Some see the nadir as an opportunity. Citigroup said in a Jan 2 note that it's now bullish on Hong Kong retail landlords.

"Hong Kong retail sales have already seen the worst year-on-year performance in August to November, driven by escalating social unrest together with a weakening yuan during the period," analysts led by Ken Yeung wrote. "With the situation now stabilizing, we expect sequential improvements on retail sales from January onwards."

The investment bank isn't so bullish on Hong Kong's office sector, saying that segment of the market is "just at the early stage of what seems to be a two-year downcycle." Its top sell is Hongkong Land Holdings Ltd while it downgraded Champion Reit to neutral from buy.

Rents in Central, an area of Hong Kong that's home to many international businesses, are most vulnerable due to a slide in demand from Chinese companies and competition from other office hubs like Singapore, Tokyo and Shanghai.

"We expect Central office rentals will be down by 10 per cent per annum over the next two years," Yeung said.

Chinese firms with office space in Hong Kong have also been reluctant to expand in the face of US-China trade tensions, and that's weighed on rents since at least late 2018, according to Chris Currie, head of Hong Kong office services at Colliers International Group Inc.

Colliers expects grade A office rents in Central, the world's most expensive prime office market, to drop by 13 per cent in 2020.

"Companies are hesitant to commit," said Currie, adding that if the protests continue, the first six months of 2020 will be even more difficult.