Fitch sounds warning on Hong Kong retail

First Hong Kong lost its mantle as the world leader in retail rents. Now the global ratings agency Fitch has issued a chilling warning.

Fitch said in a statement Thursday that street-level shops in Hong Kong’s prime areas are vulnerable to the persistent weakness in luxury retail sales and their rents will likely decline at double-digit rates in 2015.

In contrast, shopping malls with well-established tenant mixes could outperform the market with flat to slightly positive rental growth in 2015.

“Street shops in Hong Kong’s prime areas are filled with tenants selling products targeting mainland Chinese tourists, whose spending power has fallen due to a crackdown on corruption and slowing property market on the mainland.”

Sales of luxury goods were down 14.7 per cent year-on-year between January-September 2014. Luxury brands and cosmetics retailers have halted their expansion plans or even decided to restructure their store networks. For example, gold and jewellery retailer Luk Fook is relocating its stores in Causeway Bay to reduce rental costs and cosmetic retailer Sa Sa is closing some stores in tourist districts.

“We expect rents of street shops in prime areas, especially those in secondary streets, to decline substantially in 2015 because leasing demand from these popular brands is shrinking,” Fitch said.

“In contrast, shopping mall landlords will be less affected by the weaker luxury retail sales because the tenant mixes for most of them are not skewed heavily towards luxury brands. Their tenant mixes are balanced with more retailers selling daily necessities, food & beverage and medium-end products.”

Fitch predicts domestic consumption, which grew 4.2 per cent year-on-year in January-September will continue to support the sales growth at shopping malls in 2015. Performances will vary from mall to mall, however.

“Fitch expects The Landmark and Swire Properties’ Pacific Place Mall, which house many luxury retail tenants, to face challenges in 2015. We believe that The Link REIT will be the least affected in view of its focus on low- to medium-end tenants.

“Wharf Holdings, Times Square, (pictured above) and Harbour City are likely to outperform the market based on the landlord’s strong track record.

“Hysan has been more active in tenant repositioning to focus on domestic shoppers and Fitch expects it to continue delivering satisfactory sales performance in 2015.”


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