Hong Kong Landlords Squeezed as Retail Sales Fall for 14th Month

Statistics released this week show that consumer spending in Hong Kong fell for the fourteenth consecutive month during March, and the slide in shopping is already squeezing some of the city’s largest landlords.

Link REIT, Wheelock Properties and other owners of shopping centres in the city have issued profit warnings in recent weeks, while the Hong Kong government has unveiled a HK$137.5 billion ($17.7 billion) stimulus package to prop up the local economy.

With social distancing measures emptying the city’s shopping malls, investors in retail property have retreated from the market, with local real estate agency Centaline Commercial reporting total investment in shops of just HK$5.19 billion during April – down 71 percent from the HK$17.92 billion recorded in the same month last year.

Wheelock and Link REIT Sound the Alarm

In a stock exchange announcement three days ago, Link REIT said that it would report a net loss for the year ending 31 March 2020 due to the impact of COVID-19 on the valuation of its properties and rental revenue.

With around 88 percent of its 8 million square feet of retail space in Hong Kong, the REIT – which is Asia’s largest – said that the value of its investment properties is expected to drop 12.3 percent to HK$193.2 billion, compared to HK$220.4 billion as of September 2019.

Just one week before Link REIT’s announcement,  Wheelock Properties unit Wharf Reic – which owns luxury shopping complex Times Square in Causeway Bay – issued a profit warning predicting losses for the first half of 2020 due to “severe disruptions” caused by the coronavirus pandemic.

Listed in 2017 after being spun off from Wharf Holdings, Wharf Reic holds an 11.7 million square foot portfolio of Hong Kong commercial properties worth HK$276 billion.

Rents Head Downhill as Sales Collapse

With retail sales falling by 42 percent in March compared with the same month last year, tenants have been reluctant to rush into signing new leases.

According to Centaline Commercial’s managing director, Stanley Poon, 1,156 commercial shop leases were secured in April – 36 percent fewer than the month before and down 25 percent from April 2019.

The city has seen retail sales fall continuously since January 2019, with COVID-19 topping off a series of disruptions in the city which include social unrest during the second half of last year and the US-China trade war.

“Retail sales continued to plummet in March, as the COVID‑19 pandemic and resulting anti-epidemic measures brought inbound tourism to a standstill and seriously disrupted consumption-related activities,” a government spokesman said in a statement.

The official added that the business environment for retail trade will remain “very difficult in the near term amid the deep economic recession and sharp deterioration in the labour market”.

With sales plummeting, rental values have also taken a hit, with high street rents falling by 10.3 percent in the first quarter of the year from the previous three months, according to property consultancy CBRE.

Half-Off Sale

With the outlook for the retail sector looking bleak, a landlord in Causeway Bay, last month put an en bloc commercial building up for sale, marking the first time in ten years that such an asset became available on the world’s most expensive retail strip.

The owners of 519-521 Hennessy Road are asking HK$1 billion for the rights to develop a new commercial tower on the site, according to a person familiar with the matter who spoke to Mingtiandi.

In other parts of the city, some retail property owners have cut asking prices by up to 50 percent in a bid to attract buyers, with a street-front shop in Jordan changing hands last month for HK$19 million after the seller halved the asking price, according to a local media report.