How Hong Kong's high rents stifle innovation

HONG KONG -- With shop leases that only global brands can afford, the city's small businesses are driven out, while young entrepreneurs see no room to innovate.
Written by Vanessa Ko, Contributor

HONG KONG -- Earlier this year, a mom-and-pop restaurant that had been around since the 1950s, located in a relatively inexpensive area in Hong Kong, closed down after its landlord raised the rent from US$6,000 to US$15,000 per month for the 1,300-square-foot space. On the same small street, a Ralph Lauren store soon opened.

Every few months, newspapers in Hong Kong memorialize another decades-old restaurant or family-run store lowering its shutters for the last time, as it gets pushed out of the busiest neighborhoods. The story is always the same. The shop’s landlord asked for a huge rent increase — 50 percent? Double? Nothing shocks anymore — and the beleaguered business owner, faced with the bottom line, bowed out.

It does not take owning a business to feel frustrated, even saddened, by the rents. Climbing costs in the past few years have heavily impacted the retail landscape, creating downtown shopping districts filled with multinational brands of designer clothing and jewelry that target wealthy tourists and certainly not the average person living in those areas. And to many, the fast sprawling of luxury outlets and the displacement of independent businesses signals a worsening environment for would-be entrepreneurs.

“Where are the small boutiques going to be left with? It’s gotten a bit crazy because of this whole rental situation,” said Jennifer Chan, a young entrepreneur who sells a high-end line of electronic beauty products from Britain through retailers but has to pay stores a part of their rent.

“I have my own business, and I have to do something else because the rent, it just doesn’t make sense,” she said.

Late last year, an international survey determined that city’s bustling Causeway Bay area outdid New York’s Fifth Avenue for the first time to become the place with highest commercial rental prices in the world. According to the property agency Savills, the area’s prime shops rose 20 percent last year and 38 percent in 2011.

Entrepreneurs like Chan, as well as those in creative industries, a mostly younger crowd, see not just the hardships suffered by small businesses but also the difficulty of trying anything new when the financial pressures are so great.

As a self-described foodie, Chan has noticed a homogenization of restaurants available to the middle class in Hong Kong, a place often thought of as a food capital. The city is flooded with ramen shops these days, she pointed out, because restaurant owners know it works and would rather not take the risk of starting something that might not appeal to current tastes. This way of thinking creates food trends that come and go, and midrange restaurants are not exciting or high quality but “just tend to go in waves and waves of food” that is known to succeed.

Rayfil Wong, 36, chief executive of Professorsavings.com, a Youtube channel teaching finance basics, and who has started (and closed) multiple companies in the city in the past few years, explains the overwhelming effect that high rents can have on new and innovative businesses.

"A start-up's survival and lifeline is based on one major thing: burn rate," which is related to "how much cash one has to burn to keep the start-up alive," he said. "When rent makes up a majority of the burn rate, this decreases the life expectancy."

The high fixed cost of rent, Wong says, takes away from a start-up's ability to provide products that are cost efficient, which he thinks of as a crucial part of innovation.

"In the very end, business is about understanding the resources and to optimize them," he said. "But the problem is that rent is a fixed expenditure."

Day-to-day observations of the fast turnover of businesses on the ground level, sometimes with shop fronts boarded up just months after the grand opening party, are enough to scare off any aspiring business owners.

Harvey Chung, 32, an architect who works for a global company, says that rents would be a primary deterrent for people looking to start their own architecture or design firm in Hong Kong. He said the cost would push business owners to produce results faster and spend less time developing ideas. "Projects need to be done quickly and it often compromises the quality of work," he said.

He expressed admiration for the thriving coworking spaces, like Betahaus in Berlin, that bring together inventors, designers and entrepreneurs, and FabCafe, a coffee shop chain that started in Asia that features digital tools for creators to work on projects, or so-called creative hacking.

FabCafe "is a brilliant business idea and a brilliant way to promote design and creativity to general public," Chung says.

"It is unlikely to happen in Hong Kong," he added, "because of the high-rent economy."

Photo: Flickr/Wicker Paradise

This post was originally published on Smartplanet.com

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