The retail market has finally cooled after years of record-high prices. Now may be the perfect time to acquire new retail space at a more reasonable price.
Here are some tips on how to make the best investment.
Step 1: Find the right location
You’ve heard it before – location, location, location. But what makes one location better than another?
Keep an eye out for retail space near traffic lights, on a street with wide pavements where pedestrians can gather.
They’ll want to check out the shops while they wait for the lights to change.
Corner shops have the added advantage of looking bigger since they have more street frontage.
Corner shops can also be divided into smaller units that offer a more flexible retail income.
For instance, a 1,000 square foot shop may fetch HK$500,000 per month but it may be hard to find a tenant who wants to take up the whole space.
If you divide the space into two or three units, and rent each for HK$250,000 or HK$160,000 respectively, you may find tenants more quickly while earning the same amount of money.
These strategies work especially well in quieter, low-key neighborhoods, where a good corner location spells the difference between an obscure hole-in-the-wall and a local landmark that everybody notices.
Step 2: Get to know the market
In the early 2010s, when the retail market was booming, landlords were hungry for watch and jewellery businesses that were willing to pay high rents.
In today’s cooler economy, cosmetic shops and restaurants are still able to pay relatively higher rents compared to other industries.
Restaurants are particularly reliable in Hong Kong, where kitchens are small and many people rarely eat at home.
Whatever the economic situation, people need to eat.
Step 3: Learn the 4-3-2-1 formula
Ultimately, it’s up to the market whether a business will thrive or fail. Anyone who wants to sustain a retail business should learn four simple numbers: 4, 3, 2 and 1.
Here’s what that means. In a healthy business, 40 percent of your cash flow goes to costs, 30 percent to staff salaries and 20 percent to rent. The remaining 10 percent is your profit.
If you’re paying more than 25 or 30 percent on rents, you’re eating up most of your profits, putting yourself in a very risky position.
If you are a retail investor, mastering the 4-3-2-1 formula will allow you to diagnose the affordability of different industries/trades in different locations.
Veteran retail investors normally gather information such as prices and rents for study and comparison.
They constantly walk up the streets and understand the most updated operations of various trades and such down to earth approach of making their bets, keeping them afloat if not on the highland.
Step 4: Timing
Timing is important to understand when you make a purchase.
If you had the guts to invest in the market after SARS in 2003 or during the financial turmoil in 2008, you are surely a winner now having seen your assets increase in value threefold.
Step 5: Don’t forget the details
Think about what kind of business you plan to run — or hope to attract as a landlord.
If it’s a cosmetics shop, you’ll need a location with heavy pedestrian traffic. Opening a restaurant? Make sure the shop’s electrical supply is up to standard.
Whatever you do, make sure the space complies with the building code as spaces that have been illegally altered or do not have adequate fire escapes can leave you on the hook for costly renovations.
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