Hong Kong retailers in rent battle to survive virus, protests blow

Hang Lung Properties

28/02/2020 08:59

* Retailers plan second strike to urge landlords to lower
rent
    * Pressure grows on landlords to cut rents beyond one-off
measures
    * New high-end Russell St leases seen 30-50% less vs 3-5 yrs
ago

    By Clare Jim
    HONG KONG, Feb 28 (Reuters) - Retailers in Hong Kong have
launched themselves into a rare battle with the city's
notoriously unflinching landlords for deeper and longer-term
rental cuts, as they reel from the double whammy of the
coronavirus epidemic and months of political unrest.
    Given the pressures, retailers are pushing to temporarily
lower their rents in leases that are structured around a minimum
fixed charge called base rent, or a percentage of store sales
known as turnover rent, whichever is the higher amount.
    Hong Kong's economy contracted for the first time in a
decade in 2019 after anti-government protests scared tourists
away and emptied shops and restaurants. Now, many retailers fear
the coronavirus crisis is threatening their survival.
    Last week, around 50 brands took part in an unprecedented
strike, shutting 200 shops across prime shopping malls for a day
to demand their landlords reduce rent. Now they're staging a
second strike.
    The striking retailers want base rent to be waived and only
turnover rent to be charged, as foot traffic has dropped
dramatically in recent weeks. Commercial leases vary across
sectors and locations but these retailers are mostly on terms
that pay either base rent or a percentage of turnover.
    Mall landlords -- major property developers, such as
Henderson Land  0012.HK  and Sun Hung Kai Properties  0016.HK 
-- have slashed February base rents and some have extended the
cuts to March. But retailers say this is still too much to bear.
 urn:newsml:reuters.com:*:nL4N2AD131
    "A 50% reduction is obviously nice to have...but when you're
not taking in enough to cover salaries, our main interest is to
look after our staff, and of course to look after the long-term
viability of our business," said Ashley Micklewright, president
& CEO of Bluebell Group.
    He said shifting to turnover rent would go a long way to
solving retailers' problems.
    Bluebell, an Asia distributor of over 150 global brands,
participated in last week's strike. Other participants included
Italian fashion wear Patrizia Pepe and shoe wear GEOX, French
sportswear Lacoste, as well as high-end childrenswear brands Bon
Point, I Pinco Pallino and Nicholas & Bears.
    More brands will join a second strike, retailers told
Reuters, with the aim to get landlords to charge just turnover
rent until health measures such as the school suspension and a
partial mainland China border closure are revoked.
    Another group of retailers took out a full-page newspaper ad
on Valentine's Day, urging developers to exempt February rent
and charge tenants turnover rent between March and June. Before
the protests began in mid-2019, Hong Kong had the highest
turnover per square foot in Asia.
    Industry sources say food and beverage contracts pay around
8-15% of sales, fashion 15-20%, jewellery and watches 3-8% and
supermarkets 6-8%.
    But landlords are naturally resisting the proposal to charge
 turnover rent as retailers' sales plummet.
    Micklewright said his shops make 15% of normal turnover,
while some peers made no sales at all for more than two weeks.
    
    DO BIG BRANDS NEED HELP? 
    Many retailers have closed stores, cut staff and salaries to
ride out the storm. Rental costs vary but can account for as
much as half of a store's sales in some cases.  urn:newsml:reuters.com:*:nL4N2AE15J 
    Analysts say vacancy rates will rise this year, with Wharf
REIC  1997.HK  and Hang Lung Properties  0101.HK  among the most
affected due to heavier reliance on rental incomes. 
    Hysan Development  0014.HK , whose retail and office
businesses each make up for 46% of revenues, said its mall
turnover fell 20% on-year in January and that it will take
measures to retain tenants.
    Three developer sources told Reuters they are reviewing
rents and have so far offered concessions mainly to small- and
medium-sized businesses.
    Some developers, however, are adamant they don't need to
help international brands.
    "For the international big brands...it's like a billionaire
asking a millionaire for help," said one developer
representative, who did not want to be named as negotiations are
private.
    Louis Vuitton has agreed to renew its prime location lease
in Times Square, after weeks of negotiation with the landlord,
two sources told Reuters. The luxury brand was reported in early
January to likely close the store due to high rent. 
    Times Square declined to comment while LVMH could not be
immediately reached.
    Prada and smaller shops have left nearby high-end Russell
Street and new leases are expected to be 30-50% below the
previous ones from three-to-five years ago, property consultancy
Cushman & Wakefield told Reuters.
    Micklewright said 90% of the brands are looking to reduce
their presence in Hong Kong, but very few are looking to leave
for good. 
    "There's enough people in Hong Kong who have enough spending
power to justify nearly all of the brands that we're talking to
to maintain a presence here. The only reason that they would
move out would be because rents are too high," he said.

 (Editing by Marius Zaharia and Jacqueline Wong)
 ((clare.jim@thomsonreuters.com; +852 2912 6653; Reuters
Messaging: clare.jim.thomsonreuters.com@reuters.net))