Hong Kong malls people can’t avoid attract Goldman Sachs, Puma

Forget Gucci and Rolex. Grocery stores, hair salons and tutoring centers may have the brightest future for Hong Kong retail as high-end malls get squeezed by forces beyond their control.

That’s according to property consultants including Savills Plc, Jones Lang LaSalle Inc. and CBRE Group Inc., who say that community shopping centers targeting local customers are better suited to weather a downturn that has battered luxury retailers. In Hong Kong’s biggest deal involving malls this this year, Gaw Capital Partners led a group including Goldman Sachs Group Inc. in a USD2.9 billion purchase of 17 shopping centers located below public housing estates, where residents walk through the malls to get to their homes.

These regional malls are unique to Hong Kong, a densely populated city where space is scarce and apartments are often stacked on top of shopping centers, restaurants and offices. While most of these shopping centers are dominated by local retailers and family-run stores, some larger brands such as Puma, Uniqlo and Giordano have moved in, attracted by a model that insulates them from the whims of mainland Chinese tourists and competition from online shopping.

During an almost three-year retail downturn that saw sales in Hong Kong fall more than 11 percent, regional malls have fared better than their counterparts in prime locations. According to Jones Lang LaSalle, base rents for second-tier malls have edged up 0.2 percent since 2016, while rents at tier-one malls have fallen 1.6 percent in the same period.

“These malls are anchored around local communities and are consistent-yield-driven investments,” said Simon Smith, senior director research for the Asia-Pacific region at Savills. “Necessity-shopping is pretty much bullet-proof during a downturn, it’s the discretionary spending and luxury that get hit the hardest.”

To be sure, there is less upside for regional shopping centers during good times. Before a crackdown in China on conspicuous consumption in the past few years, mainland tourists would line up to shop at the likes of Prada, Gucci and Tiffany, and leave laden with luxury handbags and watches costing thousands of dollars.

“These are low-beta shopping malls,” said Cusson Leung, managing director and head of Hong Kong property and conglomerates research at JPMorgan Chase & Co. “When the retail market isn’t doing too well, they won’t do too poorly because they sell lower level stuff or necessities. In an upswing there isn’t as much upside for the landlords.” MDT/Bloomberg