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Hong Kong : Property And Rents

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Rents pinch Hong Kong retailers

By Philip Lagerkranser and Kelvin Wong Bloomberg News



HONG KONG Noel Smyth, who ran an Irish theme bar in the SoHo restaurant district of Hong Kong, anticipated a hefty rent increase when the lease at Dublin Jack's expired in October. He did not expect it to nearly double.

The landlord wanted 280,000 Hong Kong dollars, or $36,000, a month, up from 150,000 dollars. Smyth refused and closed the bar.

"A 30 percent raise would still have been a viable option," said Smyth, managing director at Delaney's International Development, which runs another three bars and restaurants in the city. "For the kind of raise they were asking, there is no way we can meet that."

Welcome to Hong Kong's latest economic recovery.

Shaking off the impact of the 2003 outbreak of severe acute respiratory syndrome, the $164 billion economy has expanded for the past eight quarters, unemployment is at a four-year low and retail sales have climbed for 26 consecutive months.

Now, say analysts, rising rents may threaten that growth.

"The surge in rents has become a serious problem, threatening Hong Kong's competitiveness," said Dong Tao, chief Asia economist at Credit Suisse First Boston.

"This will hurt the incomes of ordinary people."

Tao forecast that Hong Kong's economic growth would slow to 4.4 percent in 2006 from 5.5 percent this year. The economy grew 8.1 percent in 2004.

Retail rents in the city rose 20 percent in the third quarter from a year earlier, according to the property consultancy CB Richard Ellis.

That is fueling what Tao calls "bad" inflation - price gains caused by rising costs rather than by growing demand.

It means businesses will have less room to hire and increase salaries, he said. Hong Kong snapped almost six years of deflation in July 2004 and consumer prices rose 1.6 percent in September, the biggest increase in seven years.

Retail sales climbed in September at the slowest pace in two years, the government said Monday, suggesting that the surge in demand that pushed rents higher has begun to abate.

In Causeway Bay, home to luxury-goods retailers, prime rents almost doubled in the year through June, leapfrogging the Avenue des Champs-Elysées in Paris as the second-most-expensive shopping area in the world.

The district is now second only to Fifth Avenue in New York, according to an Oct. 26 report by Cushman & Wakefield.

The study said booming tourism from mainland China as well as from Europe and North America had driven up demand for floor space.

As a result, a host of Hong Kong businesses are feeling the pinch.

The retailer Giordano, which has 86 stores across Hong Kong, in August posted smaller than expected first-half profit. Its operating margin - operating profit as a percentage of sales - narrowed to 6.2 percent from 8.4 percent.

The company's chairman, Peter Lau, said rents, some of which had doubled from a year earlier, were "unhealthy" and he did not rule out closing some outlets. Giordano shares have fallen nearly a fifth in the past three months.

"It is serious," said Paul McKenzie, head of consumer-goods research at CLSA, who cut his rating on Giordano to "sell" from "underperform" on Oct. 26. Some landlords "have gotten very, very greedy. It's pretty much a problem across the board."

Rent increases are being driven by luxury-goods companies like LVMH Moët Hennessy Louis Vuitton and Gucci Group, which have set up flagship stores in the city.

The British luxury-store chain Harvey Nichols in September opened its first Hong Kong outlet, nestled beside Mandarin Oriental's new Landmark Mandarin hotel, where room rates start at $515 a night in the heart of the city.

With growth in visits from China cooling - arrivals from the mainland grew just 2.2 percent in the first nine months, compared with 46 percent last year - and mortgage rates at banks at five-year highs, sales at Giordano and other retailers are no longer rising fast enough to cover higher rents, said McKenzie at CLSA.

In SoHo, a restaurant district near an 800-meter, or 0.5-mile, escalator that conveys workers from the Mid-levels residential area to and from their offices, other outlets are also struggling.

Tai Cheong Bakery, whose egg tarts the former Hong Kong governor Chris Patten praised as the best in the city, chose to move after its landlord more than doubled rent.

"Restaurants in Hong Kong are not making as much money as people think," said J.R. Robertson, managing director at El Grande Group, which owns and operates 12 restaurants and bars in Hong Kong, including Grappas Cellar at Jardine House, Hong Kong Brew House in Lan Kwai Fong and East End Brewery in Causeway Bay. "A lot of these guys are hurting at the moment."

While analysts say the market will eventually settle, it may change the business mix in the heart of Hong Kong, said Tao at CSFB.

"If this continues, it won't be possible to buy a lunch box in Central in one or two years," he said. "You can't eat luxury handbags."

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blimey. i was trying to read all this, but ive been on the tequila again. one bottle and im south of the border. areeebah...

anyway. i agree with everything my mate brainclamp says reet. (hic). merry christmas everybody....

why am i drinking so late..and so alone ?

wheres mrs dead ? she should be back from ladies badminton by now.

do you think she will know ive been at the old mexican mind worm again ?

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Actually - things are rapidly turning around now in Hong Kong, (as they do in this part of the World).

Recent interest rate rises (now about 7.75%) have slowed down the residential property market in just a few short days!

I personally think that 'the party is now over' as far as property increases are concerned and many speculators are now trying to either cut their losses or walk away from purchase agreements.

I think rents will have to come down a bit for restaraunts as the population can't afford to spend due to the increased interest rate burden - and tourists from China don't eat in post restaraunts (all they do is shop!).

Property prices here could be in for a bit of a correction!


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