Hong Kong landlords, used to charging top dollar for flagship stores, are suddenly in flash-sale territory.
Prime retail rents dropped in late 2019, as social unrest disrupted commerce, scared away many of the mainland Chinese visitors who underpin luxury demand and helped push Hong Kong into recession.
With political turmoil in the semiautonomous territory unlikely to end soon, real-estate firms expect rents in the glitziest enclaves to fall again this year, by double-digit percentages.
As recently as the second quarter of 2019, brokers Cushman & Wakefield said Russell Street, in the prime shopping district of Causeway Bay, was the world’s priciest shopping street.
Tenants paid an annual $2,745 a square foot, on average, to secure retail space there, beating the upper part of New York’s Fifth Avenue and London’s New Bond Street for the second year running, Cushman found in a survey of 448 locations in 68 markets.
However, Kevin Lam, Cushman’s head of retail services in Hong Kong, said Russell Street rents fell 15% in the second half of 2019, to $2,338 a square foot. He forecasts another 10% to 15% drop for the street’s rents in the first half of 2020.
“This is a tough time for retail tenants to sustain their businesses with leases signed during the market boom,” Mr. Lam said. He said many retailers were cutting space or moving stores to better locations, while new entrants were expanding their footprint at cheaper rents.
Brokers said Italy’s Prada SpA and La Perla both plan to vacate Russell Street this year, where they have stores occupying 15,000 and 8,000 square feet, respectively. Prada isn’t expected to renew a lease that ends in August.
In addition, brokers say Louis Vuitton, which is controlled by European luxury conglomerate LVMH Moët Hennessy Louis Vuitton SA, will also close its store, in the nearby Times Square Mall, after landlord Wharf Real Estate Investment Co. refused to lower rents.
Local jewelry heavyweight Chow Tai Fook Jewelry Group said last week that it plans to close up to 15 stores in prime tourist areas including Causeway Bay, Mong Kok and Tsim Sha Tsui in the financial year beginning April. The firm said it expects to pay 30% to 50% less for Hong Kong leases renewed in the second half of the current financial year.
In November, visits from mainland Chinese tourists slumped by a record 58% from a year earlier, helping push retail sales down by 23.6%.
Mainlanders accounted for 78% of Hong Kong’s visitors last year. Many flock to the city to buy clothes, handbags, jewelry and cosmetics, and they make up a majority of sales for these products.
The year-over-year decline in mainland visitors moderated slightly in December, to a still-steep 53%. But some say the local luxury business faces challenges beyond the current unrest. Barrie Chan, deputy senior director for retail leasing at Savills, said tax cuts in mainland China had brought prices there more in line with those in Hong Kong, while a weak yuan had affected Chinese buyers’ spending power.
Cusson Leung, JPMorgan’s head of Asia property research, said the decline in high-end retail was structural, given the narrowing price differential with the rest of China, and increased online competition.
Hong Kong isn’t the only market where rents have moved dramatically. On New York’s Fifth Ave, another pricey luxury shopping district, rents have plunged by around 28% from a peak in the first quarter of 2017. An earlier ramping up of rents, plus changing consumer behavior, help explain the reversal.
However, rents along London’s tony Bond Street and the Avenue des Champs Elysees in Paris held steady in 2019, Cushman data shows.
Other brokers are also gloomy about the price outlook for Hong Kong, even as they say the lower rates are drawing interest from potential new tenants who so far haven’t set up shop in the city.
Colliers International expects rents to fall 16% this year for shops on streets in prime shopping districts.
Similarly, Lawrence Wan, senior director of advisory and transaction services for retail at CBRE Hong Kong, projected a 15% to 20% drop for shopping-street rents and a decline of up to 10% at malls.
“We expect more store closures after the Chinese new year, adding further pressure on rents,” Mr. Wan said. The holiday starts Saturday.
Landlords are approaching the situation in various ways. Swire Properties said it had made temporary and case-by-case rent cuts, “depending on an individual tenant’s unique circumstances,” and said it is confident in the market’s long-term prospects. Swire owns the high-end Pacific Place mall in Admiralty, a downtown district that has frequently been disrupted by protests.
Another landlord, Hysan Development Co., said temporary rent reductions were one possible solution, while it was also stepping up promotions to help tenants.
Mr. Wan at CBRE said some landlords were restructuring leases so payments were lower in the early stages of a contract, helping tenants preserve cash.
Other inducements include advertising blitzes to boost traffic and sales, and longer rent-free periods, typically offered at the beginning of a lease as an incentive. In some cases landlords are even buying goods from tenants, which they then offer as gifts to consumers in promotional campaigns, according to brokers.
—Esther Fung in New York contributed to this article.
Write to Joanne Chiu at joanne.chiu@wsj.com
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