Peter's Perspective
8th April 2016 by Tama Churchouse

Why it Sucks to be a Retail Renter in Hong Kong

A few years ago my wife and I had dinner at a new Italian bar and restaurant that had just opened in Central, Hong Kong.

40 minutes into the meal, we left. I won’t go into the gory details, but there was no charge. It was one of those meals you’d rather forget about.

In the taxi on the way home, I distinctly recall telling my wife “that place will survive 6 months… max”.

I was 100% wrong.

Five years on, that restaurant is still open. Being 20 metres down the street from our office here at Churchouse Publishing, the company I subsequently joined, it became our local watering hole.

At least it was our local until less than 2 weeks ago, when all of a sudden the doors were shuttered and that was that.

In all fairness, the disaster meal I had there was just 2 weeks after it opened. All restaurants take time to find their stride, so it’s not fair to judge them on that (and this a Perspectives piece, not a Timeout eatery review). But as it was our local I’ve been back many times since.

Why did it close? Did the business fail? Did they go broke?

Far from it…

The place was extremely popular.

On a Friday evening, you would have to show up an hour before the workday ended to have even half a chance at finding a seat.

Nearly every night you’d see crowds of people spill onto the pavement drinking ice cold Peroni beer and nibbling at the free tapas they generously laid out. (Peter will tell you, they made a mean negroni too.)

It was regularly crowded enough that you had to step out on to the road to walk past fifty or more office workers enjoying end-of-the-week drinks… the pavement was simply too crowded to navigate.

And because it spilled out onto the street, it was one of the few places you could have a drink and a smoke at the same time… a rarity in Hong Kong these days.

So what happened?

Well, they got kicked out by the landlord… (see image below).

When renting retail real estate in Hong Kong, doing too well can be an issue.

“Shocking” indeed.

Unfortunately, that’s why it truly sucks to be a renter in Hong Kong. And nowhere more than in the retail industry…

For those of you not familiar with how retail real estate works in Hong Kong, allow me to elaborate.

You see, not only are leases expensive, they are also short-term… typically 2 years or less.

So let’s say you sign a lease, spend a month fitting out your restaurant and then you open.

Option 1: you fail.

The food and beverage industry is notoriously tough (see Peter’s “My Top 5 WORST Investments… Part 2” for why you tread very, very carefully if you’re considering investing in F&B…).

Most bars and restaurants in Hong Kong go out of business pretty quickly.

Option 2: you succeed.

Yay! You’ve captured lightning in a bottle. Your hard work has paid off and now you can go continue to build your profitable business.

Well, not quite. Because your landlord pops by, sees how busy your place is, and what does he do? He jacks the rent up, and by no small amount either.

In Hong Kong, it’s not unusual to see retail rents go up by 50% after two years.

This is why retail, and F&B in particular, is so brutal in Hong Kong on tenants… being too successful can be as punishing as not being successful enough.

These guys, against the odds, managed to build and run a successful bar and restaurant for five years.

But wasn’t enough.

It’s a “heads I win, tails you lose” scenario for the landlord.

What’s more, the landlord gets a free lesson in what business works best for his retail space and what doesn’t.

Take our dearly departed restaurant space for example.

Let’s suppose someone opened a shoe shop… and it failed. Then a hair and beauty place opened… and that failed too.

But then, along comes a restaurant that cleverly opens out the bar area on to the street.

They hit a home run.

Now the landlord knows full well that his property works as an F&B joint. All that expensive ‘testing’ is paid for by somebody else’s expensive failures.

And that’s exactly what happened in this case. I spoke to the guy who runs a sunglasses shop a few doors up.

He said it wasn’t just the rent going up, but a new restaurant is apparently going to take its place. And it will take up four floors instead of this restaurants two (hence I suspect the “sale and redevelopment clause” was activated).

This business owner did the hard yards… made it work… provided a ‘proof of concept’ for the space… and the ultimate winner?

The landlord.

But it’s 5pm on a Friday evening, and now we have to find somewhere else to get a cold beer…

Have a good weekend,

Tama

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