Hong Kong retailers sandwiched by slower sales, high rents

Retail stores in Hong Kong's commercial districts have been having a difficult time as rents stayed high but sales slowed due to the changing spending patterns of mainland tourists.

An average of 80,000-100,000 mainland tourists have flooded into Hong Kong every day since the region opened up to mainland visitors on an individual basis with the introduction of the Individual Visit Scheme in July 2003.

During the first half of the year, the number of mainland visitors to Hong Kong hit 21.82 million, up 16 percent year on year, according to the Hong Kong Tourism Board.

Despite the huge number of visitors, an increasing number of shops in areas such as Causeway Bay were vacant or occupied on short-term leases over the summer season.

On Morrison Hill Road, an empty shop has leasing adverts all over the gate. "It has been vacant for almost half a year after the previous tenant, a women's shoe store, moved," said a security guard working next door.

It's not a rare example in Causeway Bay, where rent was ranked as the world's most expensive for the last few years, after overtaking New York's Fifth Avenue in 2012.

According to data from consultancy Cushman & Wakefield, there are as many as 126 vacant shops in Causeway Bay, up 50 percent from the end of last year. Other three shopping districts -- the Central, Tsim Sha Tsui and Mong Kok -- are in a similar situation.

"The shops are vacant because landlords ask for rents so high that tenants cannot afford, especially when retail sales are growing much slower," said Wong Leung-sing, Centaline Property Agency head of research.

Hong Kong's retail sales value fell 1.3 percent year-on-year and volume shrank 1.1 percent during the first half of the year, statistics from the Hong Kong's Census and Statistics Department showed.

The value of sales of jewelry, watches and clocks, and valuable gifts decreased the most, by 28.2 percent in June, after retreating nearly 40 percent in April and 25 percent in May.

Joseph Tung, executive director of the Travel Industry Council of Hong Kong, said high vacancy rates are partly due to the changing spending patterns of mainland tourists.

A growing number of mainland visitors coming from second- and third-tier cities are traveling to Hong Kong nowadays, who prefer mid-range products and casual restaurants instead of the luxury ones, Tung said.

Against the backdrop, some lords have been willing to accept lower rents in recent months in order to secure tenants. Initially they were not willing to cut asking rents for shops on Hong Kong Island. But the bargaining power of tenants has increased as more and more shops stand empty, Wong said.

Cushman & Wakefield analyst Hu Wing Sze forecast that rents in top-tier locations will stay firm or drop by 2 to 3 percent in the second half, while rents of second- and third-tier shopping streets will fall 5 to 8 percent.