The author is Fitch Ratings Inc.
The decline in Hong Kong 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 Hong Kong, especially those at the prime street level, face mounting downward pressure.
Hong Kong retail sales fell 1.3% year-on-year in March 2014, the first decline since August 2009. This excludes 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 Hong Kong unexpectedly fell 1.6% year-on-year, declining for the first time since 2003 when individual tourists from China were allowed to visit.
The Hong Kong 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 Hong Kong.
We expect the decline in retail sales to accelerate in the second quarter, 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 Hong Kong 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.
We expect 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.
We forecast that 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 profiles of Hong Kong property investment companies will remain robust, although their rental revenue growth will inevitably slow down in 2014.
(The article has been edited for clarity)