Brand-crazy Chinese drive up retail rents

Hong Kong: Soundwill Holdings was forced to sell many of its properties as it battled to survive Hong Kong's real estate crash in the late 1990s. Even after its stock plunged 99 per cent and debt obligations loomed, it held on to a 40-storey tower on a tucked-away street that today is the second-most expensive retail strip in the world.

Russell Street in the Causeway Bay district trails only New York's Fifth Avenue in terms of average retail rents, fuelled by mainland Chinese shoppers seeking tax-free Gucci handbags and Rolex watches. Shares of Soundwill are up more than sixfold since the beginning of 2009, the most among the 50 biggest developers listed in Hong Kong.

"We've always believed in the potential of Russell Street," Victor Chan, a director of the company his parents founded three decades ago, said in an interview at its headquarters in Soundwill Plaza, the building with almost 1,800 square metres of shopping space that the company refused to give up. "We're in the right place at the right time. This place has helped us enormously."

Intense competition

Hong Kong landlords such as Soundwill and Wharf Holdings are benefiting as shoppers from other parts of China drive up retail sales, intensifying competition for stores. Average retail rents in the city may rise as much as 15 per cent in 2012, according to broker Savills. Average rents on Russell Street are $2,472 (Dh9,079) a square foot compared with $2,500 a square foot on New York's Fifth Avenue, according to Cushman & Wakefield.

"Hong Kong is a first-class shopping city," Sigrid Zialcita, Singapore-based head of research for the Asia-Pacific region at broker Cushman, said.

"I won't be surprised if by the end of this year, we see Causeway Bay exceeding the Fifth Avenue as a retail hub."

Across Hong Kong, average retail rents have climbed for seven of the past eight years as fashion and luxury brands bet Chinese shoppers will keep up their consumption in the city, according to London-based Savills. Hong Kong and Macau are the only places in the country with no consumption taxes. Visitors from the mainland rose 24 per cent in 2011 from a year earlier to 28 million, or 67 per cent of tourists to the city.

Spending by all tourists rose 21 per cent to HK$253 billion (Dh119.7 billion), the board said. Even as China's economic growth slows, a lack of new shopping space in Hong Kong will help support rents, Joe Lin, senior director for retail services at broker CBRE Group, said. Chinese Premier Wen Jiabao set a growth target of 7.5 per cent this year, from an 8 per cent goal in place since 2005.

"Supply of new space is still limited," Lin said. "Many luxury and fashion brands are still very aggressive with their expansion plans and want to set up their flagship stores here."

Retail sales at Causeway Bay's Times Square, with tenants such as Alfred Dunhill and Vivienne Westwood, rose 24 per cent in 2011 with full occupancy, Wharf said in its annual report.

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