HONG KONG, China — In Hong Kong, fancy purses are out, sneakers are in.
U.S. luxury handbag maker Coach Inc. opened its four-story flagship store in the heart of Hong Kong’s Central district to much fanfare in June 2008, with a celebrity-studded, champagne-fueled party. In August, the company quietly terminated its HK$5.6 million ($723,000) per month lease and Adidas is moving in — paying 23 percent less in rent, according to Colliers International Group Inc.
This is not an isolated case. Russell Street in Causeway Bay, which boasted the most expensive shop rents in the world until New York’s Fifth Avenue overtook it a year ago, is undergoing a major transformation. A location formerly rented by Emperor Watch & Jewelry Ltd. that sold diamond-studded Cartier watches is now home to discount cosmetics retailer company Bonjour Holdings Ltd. that sells HK$58 packets of Hello Kitty false eyelashes and HK$18 jars of Tiger Balm ointments. Next door, rival Colourmix Cosmetics Co. has moved into a space vacated by Swiss watchmaker Jaeger-LeCoultre.
As Kering SA’s Gucci, LVMH’s Louis Vuitton and jewelry chain Chow Tai Fook Jewelry Group Ltd. bargain for lower rents or close stores amid a decline in mainland tourists who had underpinned their sales, mid-tier retailers are filling the gaps. Brands that appeal to the broader market are taking advantage of declining leases to move into some of Hong Kong’s most coveted retail locations.
“The fallout in the watch and jewelry as well as luxury sector is paving the way for fast fashion brands to expand,” Tom Gaffney, head of retail at Jones Lang LaSalle Inc. in Hong Kong, said in a phone interview.
Retail rents started falling after the city’s appeal as a shopping paradise for mainland tourists was hurt by anti-China protests last year, a slowing mainland economy and Beijing’s austerity and anti-graft campaigns, which have made the Chinese wary of splurging on luxury goods. Hardest hit have been sales of watches and jewelry, where sales have fallen year on year for the past 11 months.
"Shopping habits are changing; a couple of years ago it was not uncommon to see mainlanders go into watch stores and ask for 10 Rolexes," said Marcos Chan, head of research for Hong Kong, Taiwan and Macau at CBRE Group Inc. "Now we hardly see people even buying one."
While luxury brands are abandoning street-front locations, they are maintaining their presence in high-end malls where monthly rents are lower in part because landlords also receive a portion of sales receipts as part of a tenant’s payment.
Another source of the slowdown is that Chinese shoppers, who represent 10 percent of global tourism and more than 25 percent of luxury spending, are forsaking Hong Kong in favor of Europe, South Korea and Japan, attracted by weaker currencies and relaxed visa procedures, according to Bloomberg Intelligence. A rising backlash against mainland tourists has also hurt Hong Kong’s appeal, said CBRE’s Chan.
Jones Lang expects street rents in Central to drop a further 10 percent in 2016 after falling about 20 percent to 30 percent this year, while leases on more than 200,000 square feet of space on Queen’s Road in Central, one of the city’s premier shopping destinations, will become available between now and 2018.
Just steps from one of Hong Kong’s busiest subway stations in Central, Athens-based affordable fashion brand Folli Follie opened a store in mid-October after luxury watch retailer Carlson moved out.
Hennes & Mauritz AB is also taking advantage of falling rents to expand. On Oct. 30, it will open a four-story flagship, its largest store in Asia, in Causeway Bay.
“One part of our expansion strategy is about getting a good and competitive deal,” said Magnus Olsson, the Swedish retailer’s country manager for Greater China, declining to provide rental details. “If we were not happy, we wouldn’t have opened.”
Helen Mak, senior director of retail services at Colliers, said that while Hong Kong’s superior level of service will continue to attract tourists, they are looking for a different shopping experience on the city’s high streets.
"In the past, four out of five shops were selling Rolexes," she said. "In the future, a tourist will expect to see more varieties of retail shops in Hong Kong."
By Lisa Pham, Frederik Balfour; editors: Divya Balji, Sree Vidya Bhaktavatsalam, Andreea Papuc.