Swatch Group rent coup underlines landlord challenge

Swatch Group has secured two prime Central stores at rental rates less than half the previous tenants were paying – evidence that retail rents in Hong Kong may not yet be levelling out as the market is being told.

According to a report in the Hong Kong Economic Times (published in Chinese), Swatch is paying HK$1.4 million (US$179,300) per month to rent two shops covering some 4000sqft (372sqm) in the Central Building on Pedder Street.  That equates to HK$350 per square foot.

The previous tenant was Hugo Boss, which the HKET says was paying about $3 million per month. That equates to a reduction of more than 53 per cent

The rent stress has been brought about by the collapse of luxury watch and jewellery sales in Hong Kong over the last three years, as the Chinese government clamped down on gift-giving and cashed up mainlanders started travelling to Japan and Europe instead of Hong Kong, lured by favourable exchange rates.

Pascal Martin, Partner, OC&C Strategy Consultants, describes the current rental environment as “a re-basing to a new reality”.

“This year is an interesting year because it is three years after 2014, which marked the peak for Hong Kong retail rents. Rental contracts are often renewed after an initial period of three years, so we also see this year as the peak of “cut-down” in rent levels versus contracts signed in 2014.”

While Hong Kong retail sales have started to regain ground this year, they are still well below the so-called Golden Era and many chains have trimmed back their store networks leaving retail landlords seeking new tenants from affordable luxury brands, fashion concepts and other categories. Those tenants have been attracted to high street locations by lower rents which make the locations more commercially viable.

“Some would say that retail growth is back, but we think that it is at a level which is not comparable to what was experienced before 2014,” Martin said.

While most major retail precincts have been affected by the trend, Central appears to be hardest hit. On Pedder Street, Abercrombie & Fitch’s former  25,600sqft flagship remains empty more than six months after the US fashion brand abandoned the HK$7 million (US$903,000) a month site, despite having to pay a reported US$16 million early termination fee.

And in September 2015, Adidas took over a Coach store on Queen’s Road, paying 22 per cent less than Coach had.

Mingtiandi reports that Hong Kong’s Puyi Optical is paying HK$600,000 per month to lease two basement units totalling 1285sqft in the same building as Swatch, a 60 per cent drop from the HK$1.5 million paid by the previous tenant, luxury phone brand Vertu.

Martin says Forever 21 is another interesting example of the rental re-basing.

“When Forever 21 set up its flagship store in 2011 in Causeway Bay, it was the golden period, where we saw approximately 30 million mainland tourists in 2011 with 20 to 30 per cent growth every year. Causeway Bay was – and is – one of the top locations for mainland tourists in terms of shopping. Therefore, the high rent Forever 21 was charged for that location was partially based on the significant growth potential in mainland tourists.

“However, given the decrease over recent years, traffic – and therefore revenue – were not as expected and Forever 21 had to make the painful decision to close its Causeway Bay flagship store.”

That space has been gutted in anticipation of lingerie brand Victoria’s Secret opening a flagship at the site. But work seems to have stopped, raising questions as to when the store will open. Given the current state of the site it would appear impossible the store will be trading by Christmas.

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