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HONG KONG: Rising street-front shop rentals in Hong Kong are forcing retailers to look for cheaper upstairs outlets — a trend that has allowed landlords to increase their rental income by converting former office buildings into "Ginza-style" retail complexes.
Among the high-profile victims of the trend is Agnes b le Pain Grille, the first restaurant opened by the French fashion brand four years ago on the ground floor of 111 Leighton Road in Causeway Bay and will now move upstairs into the 15th floor at Cubus, according to agents.
"Rents of street-level shops are now at least HK$70 (RM27.37) per square foot in general. In prime locations, they would be a couple of hundred dollars per square foot," said Barry Ho, a director at property firm Capital Strategic Investment.
"But the profit margin in the food and beverage business is usually less than margins earned by other retailers — and they also have to face a few months of low season, particularly after the Lunar New Year.
"So it's not easy for them to afford such expensive rents," added Ho.
These cost pressures were forcing lower-margin food and beverage operators to move into commercial buildings renovated to take advantage of rising retail rents, where they could rent space for HK$20 to HK$40 per sq ft — a process that is transforming them into a retail mix similar to Tokyo's famed Ginza district.
"Many landlords expect rents could increase from more than HK$10 per sq ft to HK$30 per sq ft after they convert their office buildings into Ginza-like commercial buildings," said Helen Mak, a director of retail services at Colliers International. Mak said Henry House in Causeway Bay was an example of the successful development of a Ginza-style commercial building. Average rents in the building are now about HK$60 per sq ft in terms of lettable area. If it were leased as purely office accommodation, the average rent would be only HK$30 per sq ft.
Capital Strategic Investment has developed a number of such Ginza-style commercial buildings. Its latest development, H8 in Hau Fook Street, Tsim Sha Tsui, is now leased to various restaurants at rentals ranging from HK$30 to HK$35 per sq ft. Occupancy rates have reached about 80%.
Barry Ho of the firm says landlords can get more rental income from developing commercial buildings.
"Office rents at Ashley Road in Tsim Sha Tsui are about HK$22 or HK$23 per sq ft. But you could generate a rental income of more than HK$30 per sq ft if you leased to tenants in the food and beverage business," he said.
Small developer Wang On Group is one of the newcomers in the market. The company bought Hon Ying House, an old residential building in Mong Kok, last year and planned to redevelop it into a 20-storey Ginza-style commercial-retail building.
"We had thought about renovating the building into a serviced apartment," said Wang On assistant manager Moni Yeung Kwai-ling. "But the investment cost was large and we decided to develop it into a commercial building at the end."
The influx of mainland shoppers had pushed up revenues of local retailers and allowed it to raise rents of street-level shops in Causeway Bay and Mong Kok, Yeung added.
"This forced many tenants to relocate to high-rise buildings. But demand for retail buildings is strong and rents in retail buildings in Mong Kok now range between HK$20 and HK$30 per square foot," she said.
But developing such Ginza-style retail buildings was not a sure-win formula, Mak of Colliers said.
"It doesn't mean you can generate higher rental income simply by converting the office building into a commercial building. You have to put more effort into marketing and picking the suitable tenant mix.
"You can't expect rental income to increase immediately. You have to get the right market position."
Ho at Capital Strategic echoed this point. "We would choose experienced food-and-beverage operators as our tenants only. And we would seek to provide various cuisines in our buildings — if you always change the tenant mix, customers will lose confidence in your building," he said.
Location also affected the leasing of commercial buildings. As demand for grade-B office space was limited previously, the 23-storey DBS Building in Central was renovated and converted in the middle of last year into The L Place — a commercial building intended to target retail tenants. However, a sharp increase in office rents followed and the owner decided to allocate 10 floors in the building to office space, which was leased for HK$40 per sq ft, similar to the commercial floors.
Mak of Colliers said office buildings in Tsim Sha Tsui and Causeway Bay were suitable for conversion.
"The site areas of office buildings in Causeway Bay are usually small. The owners could generate higher rental income by conversion," she said. Ho of Capital Strategic Investment estimated that rents in Ginza-style commercial buildings had increased by 8% to 12% over the past 12 months. "The rent differences between street-levels shops and commercial buildings are narrowing," he said.
"But the potential rental growth of commercial buildings is limited, compared with that of street-level shops." — SCMP
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