Gone are the days when Chinese would queue up to get inside Prada, Gucci and Tiffany, and leave laden with luxury handbags and watches. The wealthiest now travel further afield, and even those who visit Hong Kong are cutting back. Average spending per overnight visitor, of whom three quarters come from China, dropped 8.8 percent in the island city last year. Luxury goods have been the hardest hit, with August sales less than a third of their April peak in 2013 before China cracked down on conspicuous consumption.

Buying habits of Chinese shoppers have also evolved, as they have become more comfortable buying luxury brands at home, or online, and have become more price sensitive when shopping abroad. This is having an impact on the $390 billion global luxury goods market and nowhere is it being felt more than at Hong Kong’s malls.

Since the downturn, Pacific Place owner Swire Properties Ltd. has refreshed its tenant mix to cater to changing spending habits and woo new visitors. It has signed 30 new tenants and doubled the number of food and beverage outlets in the past 18 months. Other landlords, including Wharf Holdings Ltd. and Hysan Development Co., are also including more lifestyle and food outlets.

Still, as visitor arrivals and retail sales start to rebound, there’s limited upside for Hong Kong’s landlords, said Patrick Wong, Bloomberg Intelligence property analyst in Hong Kong. "Receipts might be stable and resilient, but if things turn better, they may not be able to capture the growth there," he said.

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Glittering diamonds

For mall owners, broadening their mix of tenants is helping blunt the negative impact of lower retail sales, although a return to the heady times looks unlikely.

No matter how many cups of cold brew Starbucks sells, or shoes Nike flogs, they won’t be enough to offset the drop in sales of $10,000 handbags and glittering diamond necklaces. Landlords earn less through the portion of receipts tenants must share with them, and they’ve had to drop base rents for new tenants as well.

In the first half, retail revenue for Swire dropped 0.2 percent and Hysan’s fell 0.1 percent, said Wong. Meanwhile Wharf, Hong Kong’s biggest retail landlord, saw sales growth of three percent because its mammoth Harbour City mall is less reliant on luxury sales.

Still, performance might have been weaker had Swire left things as they were. "The revamp of our tenant mix has put us in a strong position for 2017, especially with sales at our mall improving since mid-2016, even amidst a very challenging retail market," Fiona Shiu, general manager of Pacific Place said in an email.

Pacific Place mall has posted sales growth in the first two quarters of 2017. Traffic has been encouraging, with increased car park use, it said. “We are confident that this positive trend will continue," said Shiu.

While Burberry, Diane von Furstenburg Studio LP and LVMH Moet Hennessy Louis Vuitton have decreased the size of their stores in Pacific Place, they aren’t pulling out altogether. Coach, which no longer has an outlet in the mall, said it is investing to renovate its Hong Kong locations and remains committed to the market.

"It’s a cycle, luxury brands won’t abandon Hong Kong, they will reduce the number of their stores," said Nicholas Bradstreet, a managing director at Savills Plc in Hong Kong. "Hong Kong has always been very resilient, but there is a caveat, it is not going to bounce back to the heyday of 2013."

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’Huge evolution’

Audemars Piguet Holding SA’s chief executive officer, Francois-Henry Bennahmias, agrees, noting that the exclusive Swiss watchmaker will have eight Hong Kong stores by year end, down from 16 at the beginning of 2016. "The wealthiest people on the planet don’t go to stores as much, stores have to go to them. That gold hunt that we lived for 20 years in the biggest avenues in the world is gone for luxury brands," he said in an interview. "We are going to see a huge evolution in the next years."

His message to landlords? "I say if you push us too far again, we will leave. There is a limit to what can be digested by a brand financially, and if goes too far then we will do something else, will go somewhere else."

Swire’s new tenants include a barber salon cum whisky-tasting spot and a Japanese green tea dessert shop, services you can’t get online. "More owners are trying to bring more traffic in and they have to increase the dwell time," said Bradstreet. "Consumers who spend more time in a shopping center are going to spend more money."

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Food & beverage

Last year, the average Chinese tourist traveling overseas spent about 17 percent less on shopping, but more on leisure and entertainment, according to the consultancy Oliver Wyman.

Hong Kong isn’t the only Asian city where things are evolving. Mall operators in Singapore have turned to unique lifestyle or dining concepts to stand out in a competitive landscape. The proportion of food and beverage tenants in Singapore malls has doubled to 40 percent in the last 10 years, according to Desmond Sim, head of research for Singapore and Southeast Asia at real-estate services firm CBRE Ltd.

Burberry has renegotiated leases and is keeping a tight control on all operating expenses, the company’s then chief executive officer Christopher Bailey said in November.

For Pure, whose owners are said to be seeking to sell a controlling stake in the gym chain, the new high-profile location in Hong Kong is a bonus. "Having Pure Yoga Pacific Place in the prime space of Hong Kong’s premium lifestyle and shopping destination, alongside luxury brands such as Prada, Hermes and Louis Vuitton, is testament to the increased significance of health and wellness in the city," the company said in an email.

— With assistance by Robert Williams, and Sterling Wong

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