The Mystery of Rising Rents on Tai Nam Street
Hong Kong’s economy has been hit badly by the pandemic, rental value of commercial stores has fallen sharply with empty stores everywhere. However, stores on Tai Nam Street in Sham Shui Po are very popular; some tenants gave up renewing their leases due to expensive rent. Why is the rental market so extreme?
Development of Hong Kong’s Commercial Rental Market
The valuation assessment on rental value of non-residential properties conducted by the Rating and Valuation Department has dropped significantly in the year of 2021/22. Commercial units and stores were affected the most Rental value of stores in Causeway Bay fell by 30% to 40%. A loft store in No. 65 Percival Street has been vacant for almost four years, and its latest rental value is about 1.176million dollars, which is dropped by 51% compared to last year.
At the beginning of the pandemic, m any landlords were still optimistic about the rents. They refused to reduce rents even when tenants withdrew or no longer renewed their leases. Due to the continuous high rents (P1) in Hong Kong in recent years, there has been an excess in supply (surplus). As a result, no one was willing to take the stores with above-average rents and vacant stores could be seen everywhere. For example, nearly one-third of the stores are vacant on Park Lane Avenue in Tsim Sha Tsui.
As the pandemic has been lasted for over a year; the economic outlook remains unclear. The opportunity cost of vacant stores for the landlords is higher than a lower rental return (PS.: this will reduce the estimated valuation on rental value of the stores.), landlords thus lowered the rents (P2).
On the other hand, sales of branded stores on jewelry, gold, luxury goods, and even sales of drug stores, dropped vigorously due to suspension on tourism. Businesses had to cut on the number of stores in order to reduce losses. Which thus lowered the dem and to rent commercial stores to D2, and the surplus enlarged to (Qs-Qd2) units.
The movement is shown in figure 1:
(ps: Supply on rental stores is assumed to be unchanged in order to show the impact on surplus due to change in market condition.)
Although the market has not reached equilibrium upon the drop in rents, it is however not a bad thing on people’s welfare. The sky-high rents in Hong Kong has always been criticized by general public. Only large enterprises are able to rent most of the commercial stores, as many specialties boutique stores could not afford the expensive rents. Therefore most of the stores on streets look similar and monotone. Since landlords reduced rents hoping to lease their commercial stores during the pandemic, boutique stores and people aiming to start businesses has been attracted and encouraged to give a try. This resulted in a “win-win” situation as boutique stores can lower their operation costs and the public can enjoy more choices.
What is the Reason for an Increase in Rents on Tai Nam Street During the Pandemic?
Tai Nam Street was originally an important area of the local fashion industry which mainly engaged in the wholesale of fabrics and button materials. However; more and more stores on Tai Nam Street became vacant as the industry transformed, Tai Nam Street is located at the inner rim of the district next to Prince Edward. The quite-but- convenient environment attracts a lot of craft stores and coffee shops to settle in which greatly increased the flow of people in the area, Tai Nam Street became a gathering spot for the youngsters. Therefore while most of the rents dropped in Hong Kong, rents of commercial stores around Tai Nam Street remained at the same level as in the past 2 years.
As coffee shops drove the flow of people on Tai Nam Street, they also drove the rents up against the market Many landlords think that they can actually get higher rents from renting to coffee shops than renting to original tenants, which causing most tenants not being renewed or ended up being shut down under the unaffordable rents Under the process of transformation of the community; how can the “new” merge with the “old” and to strike a balance between the two businesses?
When the market quantity demanded is equal to the quantity supplied, all consumers who want to buy goods at this price can be satisfied, and the producer can also sell the quantity they planned at the same time.
Excess Supply (Or Surplus)
Market quantity demanded is smaller than the quantity supplied under the current price.