Fitch: Pressure Mounts on HK Retail Rents on Subdued Retail Sales

Tue May 6, 2014 11:40pm EDT

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(The following statement was released by the rating agency) HONG KONG/SINGAPORE, May 06 (Fitch) Fitch Ratings says the decline in Hong Kong (HK) retail sales in March 2014 and lower tourist arrivals from mainland China during the May Golden Week holiday are clear signals that retail property rents in HK, especially those at the prime street level, face mounting pressure. HK retail sales fell 1.3% yoy in March 2014, the first decline since August 2009 (excluding the decline in February 2014 as sales in the first two months of the year are usually combined to remove the impact from the Chinese New Year festivities). The fall was driven by items commonly purchased by mainland shoppers, such as electrical goods and luxury products. During the first three days of the Golden Week holiday at the start of May 2014, mainland tourist arrivals in HK unexpectedly fell 1.6% yoy, declining for the first time since 2003 when individual tourists from China were allowed to visit HK. The HK retail sector has been beset by challenges, including the economic slowdown in China, a frugality campaign by the central Chinese government to rein in spending, the increasing proportion of mainland tourists from lower-tier cities and a subdued residential property market in HK. Fitch expects the decline in retail sales to accelerate in 2Q14, because sales a year earlier were boosted by a gold-buying binge that took advantage of a drop in gold prices. The main contributor to the fall in retail sales in HK this time is the drop in spending by mainland tourists, compared with the contraction in domestic consumption that drove the decline in 2009. If retail sales continue to soften for a considerable amount of time, though, domestic consumption could be dampened because the unemployment rate may rise. Fitch expects retailers, especially those targeting mainland tourists, to delay or halt expansion. Prime street level retailers are being hit by both lower sales and already high rental expenses. Rentals at prime street level shops catering to mainland tourists, particularly those selling luxury items, may face significant downward pressure. Shopping malls, with their balanced mix of tenants, are better-placed to mitigate the negative impact of lower spending from mainland tourists. Fitch expects shopping mall spot rents to remain flat or grow marginally this year. Hence, positive rental reversion is still achievable for malls in 2014, though it will not be as strong as in the previous year. The credit metrics of HK property investment companies will remain robust, although their rental revenue growth will inevitably slow down in 2014. These companies have maintained relatively low leverage and high interest coverage over the past few years. Their diversified tenant mix helps mitigate the weaker spending of mainland tourists. For example, sales at Wharf Holdings Ltd's Harbor City rose 4.2% yoy in March, bucking the contraction in the wider HK retail market. Contact: Alex Choi Associate Director +852 2263 9969 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Kalai Pillay Senior Director +65 6796 7221 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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