Luxury retail isn’t what it used to be, from Barcelona to Hong Kong.
By Nick Corbishley, for WOLF STREET:
In Barcelona, frantic backroom haggling is taking place between some of the world’s biggest luxury retailers and the owners of some of the city’s most expensive commercial real estate. That real estate is on Passeig de Gracia, a ten-block avenue that is home to two of Antoni Gaudi’s most emblematic buildings, La Pedrera and Casa Batllo. It is currently Spain’s third most expensive shopping street, having lost the top spot to Av. Porta de l’Angel (also in Barcelona) and Av. Preciados (Madrid).
Two months ago, renting a street-level store on Paseo de Gracia would have probably set you back around €3,000 per square meter. But that was before the arrival of Covid-19, when the street was teeming with international tourists, including deep-pocketed, big-spending visitors from China, Japan, South Korea, Russia and the Middle East. Today, after more than seven weeks of draconian lockdown that is only now beginning to be relaxed, there are no tourists, the street is half empty and almost all the shops are closed.
Even when the shops are finally allowed to reopen, their biggest customers — those big-spending, deep-pocketed tourists — will be nowhere to be seen. Hence the frantic behind-the-scenes haggling.
A source who is familiar with the situation told me that some of the luxury brands have made their respective landlords a brutal ultimatum: either reduce the rent by 75% or tie it intrinsically to the sales generated by the store, which right now is essentially zero. Otherwise, they will shut the shop.
The property owners, who predominantly consist of descendants of late 19th or early 20th century Catalan industrialists — what remains of the so-called alta burguesia Catalana — may have little choice but to accept the offer, or some slightly improved version of it. Retail landlords all over Europe are already seeing their rents plunge, albeit not by as much as 75%. Some landlords have voluntarily allowed their tenants to skip rent payments if the lockdown prevents them from operating. Others are desperately chasing payments and threatening their tenants with legal action.
They include UK mall giant Intu which was already in dire enough straits before the virus crisis began, forcing most of its tenants in the UK and Spain to temporarily close their stores. As of four days ago, it had only managed to recover 40% of its rents due on April 1. Among the retailers that are refusing to even engage with Intu “to find a consensual solution” are “a number of large, well-capitalized brands who have the ability to pay but have chosen not to,” the company said in a statement.
In Hong Kong, which is famous for its luxury retail, some luxury retailers have given up trying to renegotiate their rents altogether and are now staging a gradual retreat. Even before Covid arrived, the pro-democracy movement had scared away many mainland Chinese tourists, who were the mainstay of Hong Kong’s huge luxury goods sector. Covid did the rest. By late January, with most of the city’s borders with the mainland closed, visitor arrivals had slumped 97% year over year to just a few thousand a day.
As in Barcelona, without the guaranteed influx of huge numbers of well-heeled foreign tourists, the luxury retail sector now has a significantly shrunken market. By February, the sales of luxury goods (jewelry, watches, valuable gifts, etc.) in Hong Kong had slumped by 78% compared to the same month of 2019.
Many luxury brands are reducing the number of stores they operate in the city. In January, Louis Vuitton announced plans to shutter its flagship store at Hong Kong’s Times Square. Days later, Prada brought forward its planned shutdown of a nearby store to February from June. Valentino has also slashed the number of its stores in the city, as have Swatch Group brands Omega and Longines. Two home grown companies, Chow Tai Fook Jewellery Group and cosmetics maker Sa Sa International Holdings, each plan to close down 15 to 30 stores.
Whether in Hong Kong, the UK, Barcelona or just about anywhere, owners of many types of retail properties are feeling the pinch as rents plunge or dry up completely. The fact that some of the world’s richest retail brands are closing up many of their shops in some of their formerly most lucrative markets, or at least threatening to do so if the rents they pay are not sharply reduced, shows just how significantly things have changed in the last couple of months.
In Spain and the UK, temporary moratoriums on evictions prevent landlords from pushing out tenants that don’t pay. But in this environment, these landlords wouldn’t be able to find another tenant anyway, and the property would not produce revenues for the landlord. The financial stress is now spreading from retailers via landlords to their lenders. Many of these commercial property owners will apply for mortgage holidays from their banks, many of which will be approved, for the simple reason that the last thing the banks need right now is cascading defaults on commercial property loans. By Nick Corbishley, for WOLF STREET.