Thursday, 18 February 2016

Playing Musical Luxury Chairs

Hermes' flagship store in Galleria in Central may be up for sale soon
It's intriguing to find out luxury brand Hermes is planning to sell its flagship store in Central and rent space in nearby Prince's Building.

Hermes may replace either Alfred Dunhill, Ralph Lauren or Brooks Brothers whose leases will be up in the next two years.

One wonders why Hermes Asia Pacific says its decision to sell and rent instead "is a significant investment which proves Hermes' confidence in the local retail market".

Surely it means the opposite?

Hermes bought the space in 2002 for HK$190 million
The luxury retailer only owns properties in Paris and Hong Kong, so why sell the latter?

"The sale of Hong Kong is probably the result of aiming to cash in after seeing huge capital appreciation of the retail property rather than concern about poor retail sentiment," said one source.

Hermes had bought the 7,500 sq ft store in Galleria in 2002 for HK$190 million.

Hong Kong Economic Times says the space is now for sale at HK$1.5 billion, or HK$200,000 per sq ft.

Not only would that be a whopping amount, but it is also the first time in nearly a decade that ground floor retail space like that is on sale, according to Michael Chik, managing director of agency Sheraton Valuers. "This transaction will serve as a benchmark in the market," he says.

Coach had to vacate its premises due to the weak retail market
Looking at it strictly as a real estate investment, it makes sense to sell. But what about its vote of confidence for Hong Kong, if it was the only other city outside of Paris that Hermes invested in?

It's very interesting the luxury brand bought property here instead of say, Japan decades ago.

Nevertheless, the retail market is not doing well in Hong Kong now, thanks to the massive drop in mainland visitors to the city.

Bag and accessory retailer Coach closed its 13,000 sq ft flagship store at the foot of D'Aguilar Street in Central in September. It was charged a penalty of HK$130 million for terminating the lease two years before the October 2017 expiry date.

In its place is Adidas that will pay a rent of HK$5 million a month, less than what Coach paid at HK$7 million since 2008.

What would be interesting to know is how much longer Abercrombie and Fitch will be able to sustain in Pedder Building, paying HK$7 million a month too...

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