In Hong Kong’s Tsim Sha Tsui district, the mock-classical 1881 Heritage mall used to lure queues of mainland Chinese tourists eager to shop at boutiques operated by brands such as Tiffany, Cartier and Chopard. Now it attracts neither crowds nor brands. Only three of the more than 30 units at the mall owned by billionaire Li Ka-shing’s CK Asset Holdings Ltd. are occupied, and its colonnaded courtyards are quiet.

On nearby Canton Road, a shop previously rented by Swatch Group AG’s Omega for about HK$7.5 million ($962,000) a month is leased to a bank for 80% less, according to real estate agents familiar with the deal. Over in Causeway Bay’s Russell Street, a Transformers-themed fast-food restaurant has taken the place of Burberry Plc. Its rent is 89% below the HK$8.8 million the British firm was forking out in 2019, the agents said, declining to be identified because the matter is private. 

China’s collapse in high-end spending has shaken investor confidence in luxury brands across the globe as companies from LVMH to Richemont and L’Oreal report falling sales in the region. Nowhere is the scale of that decline in demand more evident than Hong Kong, which was for many years the favored destination for China’s nouveau riche to splurge on designer handbags and Swiss watches. 

“Hong Kong’s luxury market was once a paradise, but now it’s fallen into the abyss,” said Edwin Lee, founder of Bridgeway Prime Shop Fund Management Ltd., which owns a portfolio of retail properties across Hong Kong. “The days when tourists came to Hong Kong to buy luxury products without thinking are gone.”

A spokesperson for CK Asset said the 1881 Heritage mall is revamping its retail mix and plans to offer more casual F&B outlets as well as brands targeting Gen Z shoppers. The owner of the Canton Road shop couldn’t be reached for comment, while the landlord of the Russell Street unit previously occupied by Burberry, Soundwill Holdings Ltd., declined to comment.

Official figures show fewer Chinese tourists are visiting the city than before the pandemic, and those who are coming spend on average only half of what they used to. The hoped-for recovery when the border between the city and the mainland reopened at the start of 2023 hasn’t materialized. In the first seven months of this year, sales of luxury goods — which includes items such as jewelry, watches and department store receipts — were 42% below 2018’s level.

The subdued spending and shuttered stores are adding to a deepening sense of malaise in Hong Kong. Home prices are at an eight-year low, office vacancies are near a record high and the benchmark stock index is among the world’s worst performing. The city’s aging problem has been accelerated by an exodus of younger residents, while the government’s crackdown on dissent has shaken international confidence in the city. Squeezing businesses further, borrowing costs have surged due to a currency peg with the greenback, which forces the city to import US monetary policy. 

In a sign of weakening confidence, household spending fell in the three months to June for the first time since the third quarter of 2022, while analysts project economic growth will slow next year from 2023.

Companies are suffering too. Last week, New World Development Co., one of the city’s biggest property developers which also operates malls, warned it will post a HK$20 billion full-year loss. The company’s shares plunged, taking their decline this year to 44%.

“The decline of Hong Kong’s luxury sector is a symptom of the present economic challenges, which can also contribute to slower growth and employment,” said Gary Ng, a senior economist at Natixis SA. “This means the virtuous circle of higher income, wealth effect and corporate profits feeding into consumption no longer works well.”

Some of the the areas worst affected by the withdrawal of luxury brands are those that were most sought after at the height of the boom due to their popularity among mainland Chinese shoppers — Tsim Sha Tsui in Kowloon and Causeway Bay on Hong Kong Island. In 2018, landlords in Causeway Bay demanded $2,671 per square foot in annual rent, the highest in the world, according to Cushman & Wakefield Plc. Rents in that area have since fallen below Tsim Sha Tsui, where asking prices averaged $1,493 in 2023. That’s less than New York’s Upper 5th Avenue and Milan’s Via Montenapoleone.

Such gloom is a far cry from earlier this century, when the former British colony was perfectly placed to benefit from China’s emerging wealth due to its proximity and lack of goods or services taxes. At the peak in 2013, luxury sales totaled about HK$165 billion, accounting for a third of the overall retail market, as an average 112,000 mainland tourists poured into the city every day, according to official figures.

Adding fuel was a rapidly appreciating yuan, which briefly rose to a roughly two-decade high against the Hong Kong dollar. While spending slowed in the following years, it remained elevated until city-wide protests in 2019 deterred travelers. Soon after, the border with mainland China closed due to Covid, and would only open almost three years later. 

The luxury market may never recover its glory days, said Lee, the investor in retail properties. 

“Don’t even think about going back to where we were in 2013 and 2014,” he said. “It’ll probably take four to five years to get back to 2018 and 2019.”

His fund, which managed about HK$1.4 billion in assets as of the end of June, saw its net asset value fall 9.7% over three years. That’s dented sentiment among investors, some of whom wanted to leave early, adding to pressure on selling some properties to cash out, he said.

Lee is far from the hardest hit in the retail slump, thanks to his focus on buying neighborhood stores that cater largely to domestic demand. The family of the late Tang Shing-bor, known as the “King of Shops” in Hong Kong, has been looking to sell properties worth billions of dollars since 2020 due to high borrowing costs and plunging rents. Creditors have sued Tang’s family members for outstanding loan payments.

To be sure, luxury brands aren’t altogether abandoning Hong Kong. The city has no shortage of wealthy individuals, even if their fortunes have been eroded. Brands are also being aggressively courted by the big mall landlords, who are able to offer more flexibility over floor area than main street landlords.

Prada SpA, for instance, is taking on an 8,000-square-foot store in New World’s K11 Musea mall, where rent is likely to be partly based on store sales, Bloomberg News reported in July. 

In Central’s Landmark mall, landlord Hongkong Land Holdings Ltd. and tenants including Hermes International SCA and LVMH are jointly investing $1 billion to revamp the retail area to increase shop space. The Landmark is more resilient to changes in tourism patterns because 80% of its customers are local residents, according to Alexander Li, chief retail officer at Hongkong Land. The mall’s top 70 shoppers spent a combined HK$1 billion in 2023, Li said.

Still, taking on bigger stores may prove a risky strategy given the depressed outlook and still-expensive rents, according to Angelito Perez Tan, Jr., co-founder and CEO of RTG Group Asia, whose businesses include a luxury consultancy.

“Larger floor areas inevitably lead to higher rents, which could be a significant disadvantage in a sluggish retail environment,” said Tan.

To lure visitors and boost spending, local authorities have been hosting large-scale events such as conferences, exhibitions and carnivals, with more than 100 planned for the second half of this year. In February, the government said it would allocate HK$1.1 billion to bolster tourism. City leader John Lee also suggested residents smile more to make tourists feel welcome. 

The Chinese consumer could do with some cheer. Retail sales in the country are forecast to rise just 4% this year, down from a previous projection of 4.5%, according to the median estimate of economists surveyed by Bloomberg this month. That would be the slowest increase barring pandemic years since government data became available in 1999.

Even sellers of low-end goods are struggling in China, showing that this depression affecting Chinese consumers is casting a deep shadow. In late August, online retailer PDD Holdings Inc. stunned investors when it warned of declining profit and revenue, triggering a record 29% plunge in its shares.

The glum projection was the latest in a series of shocks that’s intensifying concern about the health of China’s economy. The country’s biggest bottled water producer Nongfu Spring Co. reported the slowest half-year profit growth since its listing in 2020, while dumpling chain Din Tai Fung — long one of the most popular restaurant brands in the country — revealed it was shutting more than a dozen outlets. 

This sharp shift from extravagance to frugality has undermined the outlook for global luxury brands. Like Hong Kong, these firms had bet on China for future growth. 

LVMH triggered alarm among stock traders when it revealed a 14% drop in sales in the region that includes China last quarter. Burberry and Hugo Boss AG have issued profit warnings. Cie Financiere Richemont SA, which owns high-end jewelry brands Cartier and Van Cleef & Arpels, was hit by a 27% drop in Greater China sales during the last quarter, with its watchmaking division posting a 13% slump. L’Oreal SA reported a fourth straight quarter of falling sales in North Asia, which accounts for about a quarter of its revenue.

“Over-reliance on any single market can expose the sector to vulnerabilities, as seen with the current shifts in consumer behavior,” said RTG’s Tan.

Back in Hong Kong, the fallout continues, as demand for consumer goods dwindles and the city’s shopping districts revert back to what they looked like before China’s boom this century.

The latest data showed retail sales in July plunged 12 % from a year earlier, worse than analysts had forecast. Sales of jewelry, watches and clocks sank 25%. 

“The global luxury market is becoming increasingly difficult to navigate,” Tan said. “I see it a fool’s errand for Hong Kong to simply hope to return to its previous retail heyday.”