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Hong Kong Real Estate: Retail Summary

Core Content

The document provides an analysis of the Hong Kong retail real estate market, focusing on recent trends, recovery, and investment outlook. Key themes include the improvement in retail sales and rental growth, the impact of FX trends and consumer behavior, and the performance of major retail landlords.

Main Views

• Retail Sales Recovery: The Hong Kong retail market is experiencing a faster and broader recovery in 2018 compared to 2017, with estimates of 7% yoy growth in inbound visitor numbers and 8% yoy growth in retail sales. This is attributed to favorable currency trends, strong China consumption sentiment, and improved store management by retailers.
• Near-term Data Points: Near-term data points such as airline bookings, FX trends, and consumer company comments suggest continued solid performance into the June 2018 quarter.
• Tourist and Domestic Spending: Growth in both overnight (+13%) and same-day (+14%) Chinese arrivals has driven a faster uptick in tourist spending. Domestic consumption has also picked up, contributing to the overall recovery. The one-off negative swing (mostly from motor vehicle sales) has been offset by these improvements.
• Rental Growth: High street shop rents have seen a 0.3% qoq increase in 1Q18, marking the first increase in five years. Prime shopping mall rents are expected to resume growth, supported by the recovery in retail sales and stabilization of high street rents.
• OCR Improvements: Occupancy-cost-ratio (OCR) for prime shopping mall tenants has improved, indicating better affordability and potential for rent growth. Wharf REIC's OCR improved significantly in 4Q17.
• Investment Recommendations:
  • Wharf REIC is initiated at Buy due to its exposure to quality retail properties and strong tenant performance.
  • Hysan Development is upgraded from Sell to Neutral due to a better pick-up in domestic spending.
  • Other landlords such as Sun Hung Kai Properties, Sino Land, and Cheung Kong Asset are recommended with Buy or Neutral ratings.
• Risks: Potential risks include changes in government policy, shifts in tourist spending behavior, and increased competition, especially from new free trade zones in Hainan.

Key Information

• 2018E Retail Sales Growth: Estimated at 8% yoy, up from 2% in 2017.
• 2018E Inbound Visitor Growth: Estimated at 7% yoy, up from 3% in 2017.
• High Street Rent Growth: A 0.3% qoq increase in 1Q18, with Central seeing a 1.5% increase.
• OCR Trends:
  • OCR for prime shopping mall tenants has improved, with Harbour City and Times Square reaching 17% and 19% in 4Q17, respectively.
  • Tenants have absorbed costs to maintain strategic locations and benefit from mall operators' marketing efforts.
• Market Outlook:
  • The retail market is expected to normalize at a 4-5% CAGR for arrivals and 3-4% for retail sales.
  • Long-term issues such as competition from new tourism destinations and consumer preference for "experience" over shopping could cap growth.

Investment Highlights

• Wharf REIC:
  • Ticker: 1997.HK
  • Rating: Buy
  • Price: HK$54.15
  • 12-mo TP: HK$65.00
  • Potential Upside: 20%
  • Fwd NAV: HK$81.10
  • Prem/(Disc)%: (33)
• Hysan Development:
  • Ticker: 0014.HK
  • Rating: Neutral
  • Price: HK$43.60
  • 12-mo TP: HK$43.70
  • Potential Upside: 0.2%
  • Fwd NAV: HK$67.26
  • Prem/(Disc)%: (35)
• Sun Hung Kai Properties:
  • Ticker: 0016.HK
  • Rating: Buy
  • Price: HK$121.90
  • 12-mo TP: HK$167.00
  • Potential Upside: 37%
  • Fwd NAV: HK$216.68
  • Prem/(Disc)%: (44)
• Sino Land:
  • Ticker: 0083.HK
  • Rating: Buy
  • Price: HK$13.06
  • 12-mo TP: HK$17.00
  • Potential Upside: 30.2%
  • Fwd NAV: HK$24.24
  • Prem/(Disc)%: (46)
• Cheung Kong Asset:
  • Ticker: 1113.HK
  • Rating: Neutral
  • Price: HK$67.20
  • 12-mo TP: HK$82.40
  • Potential Upside: 22.6%
  • Fwd NAV: HK$109.88
  • Prem/(Disc)%: (39)
• Kerry Properties:
  • Ticker: 0683.HK
  • Rating: Neutral
  • Price: HK$35.65
  • 12-mo TP: HK$36.30
  • Potential Upside: 1.8%
  • Fwd NAV: HK$79.30
  • Prem/(Disc)%: (55)
• Hang Lung Properties:
  • Ticker: 0101.HK
  • Rating: Neutral
  • Price: HK$18.28
  • 12-mo TP: HK$22.50
  • Potential Upside: 23.1%
  • Fwd NAV: HK$37.52
  • Prem/(Disc)%: (51)
• New World Development:
  • Ticker: 0017.HK
  • Rating: Neutral
  • Price: HK$11.20
  • 12-mo TP: HK$11.75
  • Potential Upside: 4.9%
  • Fwd NAV: HK$26.12
  • Prem/(Disc)%: (57)
• Henderson Land:
  • Ticker: 0012.HK
  • Rating: Sell
  • Price: HK$50.30
  • 12-mo TP: HK$46.00
  • Potential Upside: (8.5)%
  • Fwd NAV: HK$77.91
  • Prem/(Disc)%: (35)

Key Risks

• Government Policy Changes
• Shifts in Tourist Spending Behavior
• New Competition from Free Trade Zones in Hainan
• Interest Rate Fluctuations
• Economic Downturns
• Unforeseen Market Sentiment Shifts

Additional Notes

• The HK retail market is expected to see 15% sales growth in 2018, with supermarket and electronics showing strong performance.
• Mainland Chinese tourists are the primary driver of retail sales growth, with a notable increase in both overnight and same-day arrivals.
• Infrastructure improvements, such as high-speed rail, are expected to support continued inbound traffic and retail growth.
• Retail spot rent growth is modeled at 5-7% p.a. for 2018E/19E, up from 3-5% previously.

Conclusion

The Hong Kong retail market is showing signs of recovery, driven by favorable FX trends, strong China consumption, and improved store management. The first increase in high street shop rents in five years signals a turning point, and prime shopping mall rents are expected to follow. Investment recommendations highlight a more positive stance on certain landlords, with Wharf REIC and Hysan Development receiving upgrades. However, long-term risks such as policy changes, competition, and economic conditions must be considered.