Causeway Bay's average annual prime rent up 34% at end-June

Hong Kong's Causeway Bay has dethroned New York's Fifth Avenue as the world's most expensive retail area, as luxury brands retailers such as Burberry, Salvatore Ferragamo and Gucci compete for limited prime space in the city to court big spenders, particularly mainland tourists.

The average annual rent at Causeway Bay, the prime retail district on Hong Kong Island, surged 34.9 percent to $2,630 per square foot at the end of June from a year ago, beating the $2,500 price tag of Fifth Avenue in New York's Manhattan district, which has occupied the top spot for 11 consecutive years, according to estimates by commercial real estate consultant Cushman & Wakefield Inc.

"There has been the usual jostling for the top positions between Hong Kong and New York but of course the real message here is the unfaltering advance of the top global cities, fuelled by a shortage of supply and the interest of international brands," John Strachan, Head of Global Retail Services at Cushman & Wakefield, said in a statement.

Luxury retailers are competing for the most coveted shopping destinations, pushing up rents as well as revenues of landlords, Cushman & Wakefield said.

Average prime rents in Hong Kong surged by 21.8 percent this year "as a result of a strong demand from a diverse group of new international retailers and the scarcity of available space", said Michele Woo, Senior Director for Retail Transaction Services at Cushman & Wakefield's Hong Kong unit.

Burberry Group Plc opened a shop on Russell Street in the Causeway Bay district earlier this year. The UK luxury-goods maker reportedly agreed to pay HK$7.7 million a month for the occupancy of the property, more than doubling the HK$3.3 million paid by Nokia, the previous tenant.

International fashion brands and luxury retailers have used flagship stores in Hong Kong to break into the Chinese mainland market by implanting a good impression of their brands on visiting mainland tourists, analysts said.

Big landlords in Causeway Bay such as Wharf (Holdings) Ltd, Hysan Development Co and Emperor International Holdings Ltd reported rising sales for their tenants as visitors from the mainland took advantage of tax-free shopping in Hong Kong.

During the first eight months of this year, a total of 31.6 million mainland tourists visited the city, outstripping the 28.1 million registered last year, which now also accounted for over 70 percent of the total visitors to the city, latest government data show.

Hong Kong will remain the top shopping destination for mainland tourists over the coming years, thanks to its competitive advantages including broader spectrum of products, earlier availability, genuine goods as well as competitive prices, Jones Lang LaSalle said in a report on Tuesday.

Wharf reported a 13 percent annual gain in first-half revenue generated at its Times Square mall located right in the Causeway Bay district, where tenants include branches of Salvatore Ferragamo Italia SpA, PPR SA's Gucci, Chanel SA, Mikimoto and Christian Dior SA's Marc Jacobs.

The strong demand for retail space has prompted some landlords to convert part of their office floors into retail space. A case in point is Wharf which has reportedly converted some lower office floors in its Harbour City complex in Tsim Sha Tsui, a prime retail area in Kowloon, into "semi-retail" use, such as spas and beauty centers.

Bloomberg contributed to this story