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Escalating Tensions in Hong Kong Could Shift Retail Landscape as Sales Suffer

Deteriorating business conditions in Hong Kong owed to ongoing protests could change the retail landscape as luxury firms curtail store expansion plans and rent concessions help non-luxury retailers make inroads to the area just outside of Central, Hong Kong.

The luxury shopping mecca in the district of Central has been hurt by protests by Hong Kong citizens, which has hampered tourism from Mainland China. And the spread of the protests to other areas, including the Hong Kong International Airport, has also curtailed overseas tourism to the area.

Early Thursday, Chinese troops were seen moving into Hong Kong, creating unease over a Beijing-led crackdown on the unrest there. There are no indications that the protests will end anytime soon and, if anything, overseas reports about the number of troops moving across the border into Hong Kong are stoking fears that military action would not be out of the question should conditions worsen.

The 12-week long protests began in March after the Hong Kong government proposed a law that would allow criminals to be extradited to Mainland China. Hong Kong, a former British colony, was returned to China in 1997. It has been under Chinese rule since then, but under a “one country, two systems” approach that allows Hong Kong citizens some freedoms not available to Mainland citizens. Concerned that they could lose their unique status, Hong Kong citizens began protesting the legislative bill. And even though the extradition bill was suspended on June 15, anti-extradition protesters have continued their protests because it has not yet been fully withdrawn from legislative consideration.

Chinese military vehicles were seen moving into Hong Kong this week. The Chinese People’s Liberation Army has had a presence in Hong Kong since 1997. State-run news agency Xinhua released a statement Thursday noting that the Hong Kong Garrison of China’s PLA completed its “22nd rotation since it began garrisoning Hong Kong in 1997.” The statement said it was a “normal routine annual rotation” and approved by the Central Military Commission.

And as the protesters continue their demand for greater democracy, the Garrison pledged that it would “resolutely follow the command of the Communist Party of China” and firmly implement the “one country, two systems” principle.

Impact on retail and leasing

Some companies are pulling back on expansion plans as business conditions continue to worsen in Hong Kong, a move that could pave the way for a different group of retailers entering the market as landlords cut deals to fill their vacancies.

David Ji, director and head of research and consultancy for Greater China at global real estate firm Knight Frank, noted in a report this month that between the effects of the U.S.-China trade war and social unrest in Hong Kong, some companies have adopted a “wait and see” attitude. Overall leasing momentum on Hong Kong island is expected to continue to soften in the short term, while a foreseeable increase in vacancy would likely lead to lower rents in Central.

Italian luxury brand Prada noted a 5.1 percent year-over-year decline in net sales when it released its recent interim report, citing social unrest in Hong Kong as a contributing factor. There are also reports that Prada, according to Ji, was “considering surrendering its existing lease on Russell Street in Causeway Bay,” a site he said is about 15,000 square feet with a monthly rent of 9 million Hong Kong dollars ($1.1 million).  Korean fast-fashion chain SPAO has said it will shut down its Hong Kong branch, and that U.K. fashion chain Jack Wells, under bankruptcy supervision and recently sold to Sports Direct, will exit Hong Kong.

Some landlords are offering concessions. One example is shopping mall D2 Place in Cheung Sha Wan, which is offering a one-off rental subsidy that’s the equivalent of one month’s rent, according to Ji. And while shops are feeling pressure from lower sales, Ji also said the restaurant sector has seen the worst performance in 10 years. The continuing social tension and worsening economic outlook has Ji forecasting that “retail rents in prime streets, especially Central, to fall up to 10 percent for the whole year.”

Luxury spending

As for the impact on luxury spending, Alessandro Bogliolo, chief executive officer of U.S. accessories firm Tiffany & Co., in a conference call Wednesday after the company posted second-quarter results, said the company’s 3 percent decline in global sales was due in part to “meaningful business disruptions in Hong Kong.” He explained that Hong Kong, where the company has 10 stores—representing its fourth biggest market for total sales after the U.S., Japan and Mainland China—has had its own unique set of challenges.

“Obviously, we hope for a quick and peaceful resolution to the unrest being experienced there. But, in the meantime, we must acknowledge that the current situation is taking a toll on our business. In fact, we estimate that during the second quarter, we lost nearly six full selling days due to unplanned store closures,” Bogliolo said.

Tiffany is still planning on opening its new Hong Kong flagship within the next six months. The three-floor, street-facing store is at One Peking Road, which Bogliolo described as the “most popular shopping area in Hong Kong among Chinese tourists.”

The company’s chief financial officer, Mark J. Erceg, did caution on the call that while the situation in Hong Kong is “fluid,” if the unrest continues “much longer at its current rate,” Tiffany might find itself at the lower end of guidance, but that if the “situation were to deteriorate even further or if the current level of unrest is maintained for the balance of the fiscal year, we may find ourselves below the bottom end of our ranges.”

Earlier this month, a report from Cowen & Company analyst Oliver Chen, noted that luxury brands could see a sales hit of between 10 percent to 60 percent if disruptions owed to Hong Kong protests continue through the end of 2019.

Overall retail sales

Although the luxury sector is the one that’s been hit the hardest, the impact is far reaching as spending has dropped across most categories.

Hong Kong’s Census and Statistics Department said in their report last month that the value of total retail sales in June–the most recent data capture that’s available–fell by 6.7 percent from June 2018. For the same year-over-year period, the report estimated that the volume of total retail sales fell by 7.6 percent. By category, the value of sales of luxury goods such as jewelry, watches and valuable gifts dropped by 17.1 percent, while apparel sales were down 8.2 percent. Department store sales declined 6 percent in value, while sales of medicines and cosmetics slipped 4.1 percent. Footwear and accessories saw a decline of 1.4 percent. The report for July sales is due out on Friday.

Annie Yau Tse, chairman of the Hong Kong Retail Management Association, noted in her monthly report for August that “due to the protests that have been going on since June, [the] majority of our member companies indicated that the sales performance has further dampened during the July and August summer sales season. Some member companies even reported high double-digit drop in sales for shops located at the protest areas.”

Because the protests have spread to different districts and the Hong Kong International airport, Tse said “the Association expects a double-digit drop in total retail sales value for the year 2019.” Some member firms, according to Tse, have also said their staff ‘s income, which is paid on a commission basis, has declined from the “tremendous sales drop caused by significant business disruptions.” Tse has asked landlords to collaborate with tenants and provide rental and management fee relief measures so Association members can work through the current retail challenge “without going out of business or cutting headcount.”

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