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HONG KONG/SINGAPORE, July 25 (Reuters) - Hong Kong's main shopping district is gaining on New York's 5th Avenue for the title of world's most expensive retail zone as rents rise by 35 percent a year, pushing chains such as H&M out to the cheaper suburbs.
Swedish fashion chain Hennes & Mauritz's first store in Asia was a 30,000 sq ft (2,800 Sq m) flagship in Central, the heart of Hong Kong. But with the lease up for renewal and the rent set to double, the world's second-largest clothing retailer wil l close the location next year and seek new store space elsewhere.
Space has always been at a premium in Hong Kong, an island-city, like Manhattan, where developers plant high-rises on every available inch. Retail rents in prime shopping areas are rising more rapidly here than in New York, London or Paris.
Average annual rent along Hong Kong's Queen's Road Central - where H&M's soon-to-be-closed flagship store is located - soared to $1,831 per square foot in March, up 35 percent from a year earlier, data from real estate brokerage Colliers International shows. On New York's 5th Avenue, average rents rose 23 percent to $2,633 per square foot.
Colliers estimates Hong Kong's retail rents will overtake New York as early as 2014.
"Hong Kong rents are going through the roof," said Sally MacDonald, chief executive of Australian handbag and accessories maker Oroton, which has been looking to open a store in Hong Kong but could not find the right fit at the right price.
"It's a concern because that's a market that booms and busts and the rents are probably unsustainable," she said.
Some firms are still willing to pay for a prime location in Hong Kong, long considered the gateway to mainland China - a place to study Chinese buying habits before taking on Beijing's bureaucratic challenges.
Zara, owned by Spain's Inditex SA, is taking over the massive space being vacated by H&M, an unusual case of a direct rival replacing a competitor. It will pay a monthly rent of HK$11 million ($1.4 million), up from HK$5.5 million ($709,200), according to Helen Mak, director of retail services at Colliers, which advises companies on leasing shop space.
Zara did not immediately return calls seeking comment.
H&M spokesman Hacan Andersson confirmed that the Swedish retailer could not reach agreement with its landlord and was closing its central Hong Kong store next year.
"There is no drama in this," Andersson said in an emailed response to questions from Reuters. "We open and close stores regularly to always have the best business location."
Now some global chains are bypassing Hong Kong and jumping straight into China or starting out in Southeast Asia instead.
"In the past, even two years ago, you needed the store in Hong Kong in order to be successful in Shanghai," Oroton's MacDonald said in a telephone interview. "I think already, you can have the store in Shanghai without the store in Hong Kong and be respected."
Debenhams Plc, the British department-store chain, has two stores in Malaysia via a local partner and plans to enter Singapore later this year. Industry sources say it scoured Hong Kong for years without finding the right location. Debenhams declined to comment.
"It is no longer essential to use Hong Kong as a stepping stone," said Simeon Piasecki, former managing director of Marks & Spencer in Asia. "It's not an easy place to get into."
Retailers have found one way around the high rents: "pop-up" stores that open for just a few months at a time to test demand.
Topshop, the British high-street chain, opened one in May in Shenzhen, just across the border from Hong Kong. The store will close in August. Oroton did something similar in Hong Kong be t ween September 2010 and February 2011, catching both the Christmas and Chinese New Year shopping seasons.
The crush for space is good news for landlords such as Wharf Holdings, Swire Properties, Hongkong Land and Sun Hung Kai Properties, which can push up rents even in suburban malls.
Landlords are able to dictate terms in Hong Kong, and retailers often take two years to find a location, if they are able to get space at all.
"In the beginning they have this great plan, then after several months of planning and meeting with landlords, they realise it's not easy to find retail space in Hong Kong," Joe Lin, senior director of retail services at property brokerage CBRE, said.
Wee Liat Lee, the head of property research at BNP Paribas Securities in Hong Kong, expects retail rents for prime shopping mall space to rise 13 percent in Hong Kong this year and another 10 percent next year.
"The core area rental will continue to grow and become the most expensive in the world," Lee said, adding that growth would likely taper off within three to five years as more retailers decamp to suburban malls.
But with sales growth slowing, sceptics say retail property values look unsustainably high. Shop space has seen a flood of speculative interest since Hong Kong introduced a special stamp duty on home purchases in November 2010.
The average purchase price for retail space on Hong Kong island shot up 36 percent in 2011, according to government data, far outpacing the 4.6 percent increase in rents.
"Sooner or later the owner of the shops will have to rent the stores to cocaine retailers," John Au-yeung, a property broker who runs the company Fidelity Realty, said.
"I've been telling my clients not to buy retail space. The rents the retailers are willing to pay is directly based on the revenue they can make."