Hong Kong | Gucci spars with landlords as mainland demand slumps

A pedestrian walks past a Prince Jewellery & Watch Co. store on Russell Street in Causeway Bay

Landlords on Hong Kong’s Russell Street a year ago could boast the highest retail rents in the world. Now they are adjusting to a new reality.
Burberry Group Plc, Kering SA and jewelry retailer Chow Tai Fook Jewellery Group Ltd. are pushing landlords to lower rents on existing properties as luxury brands are scaling back amid plummeting sales. TAG Heuer closed its Russell Street store last week, citing high rents and declining traffic.
Luxury retail sales have plunged amid China’s economic slowdown and President Xi Jinping’s austerity and anti-corruption campaigns, causing Hong Kong to relinquish the top spot to New York’s Fifth Avenue in November and spurring the biggest drop in retail rents this year since 2009. Also contributing to slack demand are a weaker yen and euro, prompting Chinese tourists to favor Japan and France over Hong Kong, said Helen Mak, senior director of research at Colliers International.
“Unavoidably rents will trend down,” says Marcos Chan, head of research for Hong Kong, Macau and Taiwan at CBRE Group Inc. “We don’t see any reason why retail will quickly see a rebound any time soon.”
Jewelry, watches, clocks and valuable gifts sales fell 15.9 percent in the year ending June, according to Hong Kong Retail Management Association statistics.
In a July research report, Jones Lange LaSalle Inc. predicted high-street rents will drop 15 percent to 20 percent this year. That’s a far more bearish scenario than the 5 percent drop the company was forecasting at the end of last year.
Ground zero of the downturn is Russell Street, a mere block and a half long in the heart of the Causeway Bay retail district, lined with shops selling Montblanc pens, Omega watches and Swarovsky jewelry. Average monthly rents in the area fell 10.4 percent in the first half, according to Colliers.
Kering, the owner of the Gucci brand, has warned that it may close some of its shops in Hong Kong if rental costs don’t come down.
“Many landlords have not necessarily understood that the markets have changed,” Kering Chief Financial Officer Jean-Marc Duplaix said on a conference call with analysts in July.
Russell Street’s two largest landlords are Emperor International Holdings Ltd. and Soundwill Holdings Ltd.. A spokeswoman for Soundwill, whose tenants include Burberry and a Rado shop which is moving into the spot vacated by TAG Heuer, declined to provide rental figures.
While luxury retailers are slowing down their pace of expansion, some mid-market shops are looking to expand and may be able to find more affordable options, CBRE’s Chan said in a Bloomberg Television interview yesterday.
“We see landlords are willing to negotiate with the retailers, a trend which did not happen in the past few years,” he said.
Street-level landlords in Central on Hong Kong Island, and across the harbor in Kowloon neighborhoods that cater heavily to mainland shoppers, are also feeling the pinch. Average rents fell 15 percent in Tsim Sha Tsui in the first half, Colliers said. Frederik Balfour and Annie Lee, Bloomberg