by
Bloomberg
Published
September 3, 2024
Heritage, a classically-styled mall built in 1881 in Hong Kong’s Tsim Sha Tsui district, once drew queues of mainland tourists eager to shop at boutiques run by brands like Tiffany, Cartier and Chopard. But now the crowds and brands are gone. Owned by billionaire Li Ka-shing’s CK Asset Holdings, the mall’s 30-plus stores are all but occupied, and its colonnaded courtyard is silent.
Nearby on Canton Road, a store that Swatch Group Inc.’s Omega rented for about HK$7.5 million ($962,000) a month is being let to banks for 80% less, real estate agents with knowledge of the deal said. On Russell Street in Causeway Bay, a Transformers-themed fast-food restaurant replaced a Burberry store. The rent for the store is 89% lower than the HK$8.8 million Burberry paid in 2019, said the agents, who asked not to be identified discussing the matter as it is private.
The slump in luxury spending in China has shaken investor confidence in luxury brands around the world, with companies from LVMH to Richemont to L’Oreal reporting declining sales in the country. Nowhere is the scale of the drop in demand more evident than in Hong Kong, long a favorite destination for China’s nouveau riche to splurge on designer handbags and Swiss watches.
“Hong Kong’s luxury market was once a haven, but now it’s fallen into the abyss,” said Edwin Li, founder of Bridgeway Primeshop Fund Management, which owns retail properties across Hong Kong. “The days when tourists could come to Hong Kong and buy luxury goods without thinking are over.”
A spokesman for CK Assets said 1881 Heritage Mall plans to revamp its retail format to include more casual dining options and brands targeted at Gen Z. The owner of the Canton Road store could not be reached for comment, while Soundwill Holdings Ltd, owner of the Russell Street store formerly occupied by Burberry, declined to comment.
Fewer Chinese tourists are visiting Hong Kong than before the pandemic, and the average tourist spends only half what it used to, according to official statistics. Hopes of a recovery were high when Hong Kong’s border with mainland China reopened in early 2023, but that has yet to materialize. In the first seven months of this year, sales of luxury goods, including jewelry, watches and department store sales, were 42% below 2018 levels.
Curtailed spending and shuttered shops have added to Hong Kong’s deepening recession. House prices are at an eight-year low, office vacancy rates are nearing record levels and stock indexes are the worst performing in the world. Hong Kong’s ageing problem is being exacerbated by an exodus of younger residents, and the government’s crackdown on dissent has shaken international confidence in the city. Hong Kong’s currency peg to the U.S. dollar has caused borrowing costs to soar, forcing it to adopt U.S. monetary policy, further increasing pressure on businesses.
In a sign of weakening confidence, household spending fell for the first time since the third quarter of 2022 in the three months to June, and analysts are forecasting slower economic growth from next year, 2023.
Businesses are also struggling. Last week, New World Development Co., Hong Kong’s largest property developer and shopping mall operator, warned that it could post a full-year loss of HK$20 billion. Its shares have plummeted, down 44 percent this year.
“The decline of Hong Kong’s luxury sector is a symptom of current economic problems and could also lead to slower growth and employment,” said Gary Ng, senior economist at Natixis SA. “It means the virtuous cycle of rising incomes, wealth effects and corporate profits spilling over to consumption is no longer working as well.”
Among the areas hardest hit by the luxury withdrawal are Tsim Sha Tsui in Kowloon and Causeway Bay on Hong Kong Island, two of the most popular areas at the height of the boom because of their popularity with mainland Chinese shoppers. In 2018, landlords in Causeway Bay were asking $2,671 per square foot per year, the highest in the world, according to Cushman & Wakefield. Rents there have since fallen below Tsim Sha Tsui, which has an average asking price of $1,493 in 2023. That’s cheaper than New York’s Upper Fifth Avenue and Milan’s Via Montenapoleone.
This bleak picture is a stark change from the early 20th century, when Hong Kong was well placed to benefit from China’s newly wealthy — its proximity to Hong Kong and the lack of a goods and services tax. At its peak in 2013, luxury sales were about HK$165 billion, a third of the total retail market, and an average of 112,000 mainland Chinese tourists visited Hong Kong every day, according to official statistics.
The rapidly rising yuan also hit a nearly 20-year high against the Hong Kong dollar, helping to spur an economic boom. Consumption slowed in the years that followed, but the currency remained strong until Hong Kong-wide protests in 2019 drove travelers away. Shortly thereafter, the border with mainland China was closed due to the coronavirus, only to reopen almost three years later.
The luxury market may never regain its glory days, said Lee, the retail real estate investor.
“Don’t think about going back to 2013 or 2014,” he said. “It’s probably going to take four or five years to get back to 2018 or 2019.”
His fund, which had about HK$1.4 billion in assets under management as of the end of June, has seen its net assets fall 9.7 percent over three years, which has dampened investor sentiment, with some investors wanting to exit early and increasing pressure to sell some properties to raise cash, he said.
Lee has not been hit hardest by the retail downturn because he has focused on acquiring nearby stores that primarily serve domestic demand.The family of the late Tang Sing-bo, known in Hong Kong as the “shop king,” has been considering selling billions of dollars’ worth of real estate since 2020 due to soaring borrowing costs and plummeting rents. Creditors are suing Tang’s family for unpaid loan payments.
To be sure, luxury brands are not retreating entirely from Hong Kong – there is no shortage of wealthy people here, even if their fortunes are declining – and big-mall owners are also actively courting brands, as they have more flexibility with floor space than their high-street counterparts.
For example, Prada is planning to open an 8,000-square-foot store at New World’s K11 Musée Amérique mall, but the rent will depend in part on the store’s sales, Bloomberg News reported in July.
At the Landmark Mall in Central, landlord Hong Kong Land Holdings and tenants including Hermes International SCA and LVMH are jointly spending $1 billion to renovate the retail area and expand store space. Alexander Li, Hong Kong Land’s chief retail officer, said the Landmark is more resilient to changes in tourism patterns because 80% of its customers are locals. The mall’s top 70 shoppers will spend a combined HK$1 billion in 2023, Li said.
Still, expanding stores could be a risky strategy given the weak economy and still-high rents, said Angelito Perez Tan Jr., co-founder and CEO of luxury consultancy RTG Group Asia.
“Larger floor space necessarily means higher rents, which can be a big disadvantage in a sluggish retail environment,” Mr Tan said.
To attract tourists and boost spending, local authorities are hosting large-scale events such as conferences, exhibitions and carnivals, with more than 100 planned for the second half of the year. The government announced in February that it would allocate HK$1.1 billion to boost tourism. Mayor John Lee has also suggested that residents smile more to convey a welcoming feeling to tourists.
Chinese consumers need to cheer up: Economists surveyed by Bloomberg this month now expect China’s retail sales to grow just 4% this year, down from a previous forecast of 4.5% growth. That would be the slowest growth rate excluding pandemic years since government data became available in 1999.
Even sellers of low-cost goods are struggling in China, showing the deep shadow of the recession hitting Chinese consumers. Online retailer PDD Holdings Ltd. spooked investors in late August by warning of falling profits and sales, sending its shares plummeting a record 29%.
The bleak outlook is the latest in a series of shocks that have intensified concerns about the health of China’s economy. Nongfu Spring, China’s largest bottled water maker, reported its slowest half-year profit growth since listing in 2020, while dumpling chain Din Tai Fung, long one of China’s most popular restaurant brands, said it would close more than a dozen stores.
The sudden shift from luxury to austerity is souring the prospects for luxury brands around the world. As in Hong Kong, these companies had bet on China for future growth.
LVMH said sales in a region that includes China fell 14% last quarter, sparking alarm among stock traders. Burberry and Hugo Boss AG issued profit warnings. Richemont Financiere, which owns luxury jewelry brands Cartier and Van Cleef & Arpels, saw sales in Greater China fall 27% last quarter, with its watch division plunging 13%. L’Oreal said sales in North Asia, which accounts for about a quarter of its revenue, fell for the fourth straight quarter.
“Over-reliance on the single market could make the industry vulnerable to current changes in consumer behaviour,” RTG’s Tan said.
The effects continue in Hong Kong, with demand for consumer goods falling and the city’s shopping district reverting to its pre-China boom period this century.
The latest data showed retail sales fell 12% in July from a year earlier, worse than analysts had expected, with sales of jewelry, watches and clocks falling 25%.
“The global luxury market is becoming increasingly tricky to navigate,” Tang said. “It would be foolish to hope that Hong Kong can simply return to its former retail glory days.”