Fitch: HK Landlords' Ratings Firm in Face of Retail Sales Slump
21/07/2016 08:22
(The following statement was released by the rating agency) HONG KONG, July 21 (Fitch) Hong Kong commercial landlords will be able to withstand a decline of up to 30% in retail rental income and a similar fall in their investment property value without imminent pressure on their credit ratings, Fitch Ratings says. This is because these companies have strong recurring EBITDA coverage ratios and low leverage ratios based on net debt/investment property value. Fitch believes the continued decline in retail sales in Hong Kong will affect shop rentals only gradually. Rentals will not be immediately affected because the proportion of rent based on tenant sales is small compared with the fixed rent portion, and retail leases in Hong Kong typically run for three years. Office rentals will remain resilient due to limited supply in Hong Kong's CBD, which will help the Hong Kong landlords to offset some of the risks from their retail portfolios. The value of retail sales in Hong Kong has been declining each month since December 2014. Retail sales fell 8.4% in May 2016 from a year earlier. Monthly retail sales value for jewellery, watches and clocks, which are seen as a proxy for luxury retail sales, was down 18.7% in May 2016 from a year earlier. The Hong Kong property investment companies that are more exposed to the luxury retail segment are adjusting their tenant mix to increase the proportion of food and beverage (F&B). For example, Swire Properties Limited (A/Stable) recently announced that the F&B space at its high-end Pacific Place mall will be increased by 50%, which means the addition of at least 10 new outlets. Whether the change in tenant mix will result in lower rental rates for this mall is uncertain, but Swire Properties may benefit from a more stable source of rental revenue, in Fitch's view. Retail accounted for about 40% of Swire Properties' total rental income in 2015, while office accounted for about 55%. Wharf (Holdings) Limited (A-/Stable) is most exposed to retail property among Fitch's rated Hong Kong landlords, with retail accounting for 70% of total rental income in 2015. Office made up 26% of rental income in 2015. If Wharf's Hong Kong retail rental income declines by 30%, it will have limited ability to maintain its recurring EBITDA coverage ratio at a level consistent with its rating. This scenario is unlikely to occur in the next 12-18 months, in Fitch's view. Wharf is refining its tenant mix by introducing new brands and new restaurants, and launching promotional programmes to attract shoppers to its high-end malls, Harbour City and Times Square. Contact: Rebecca Tang Associate Director + 852 2263 9933 Fitch (Hong Kong) Limited 19th Floor, Man Yee Building 68 Des Voeux Road Central, Hong Kong Vanessa Chan Director +852 2263 9559 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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