Hong Kong’s Largest Mall Owner Cuts Rents Up To 50%

Commenting on the regional impact of the Covid-2019 epidemic, Morgan Stanley writes that Hong Kong’s tourism, trade and domestic consumption could be significantly affected, further aggravating the technical recession the financial hub found itself going into 2020.

Looking ahead, MS lays out two scenarios: should the outbreak peak in February/March with swift normalization of economic activity (Scenario 1), the bank estimates a 1-2% drag on 1Q GDP growth, meaning the recession started by Hong Kong’s protests will likely extend for one more quarter, but the impact could be larger at 2-4% if existing travel restrictions stay for longer and the production normalization process is slow in mainland China (Scenario 2). In the worst-case scenario 3, where the outbreak lasts for months, the impact on growth could reach 3-4.5% in 1H.

As such, Morgan Stanley remains cautious on the local stock market (the Hang Seng Index) and keeps MSCI HK Underweight given their sizeable revenue exposure to the local Hong Kong market (19% for Hang Seng and 50% for MSCI HK), and see greater near-term pressure for Banks and Retail than Telecom, Insurance and Macau Gaming.

One sector where Morgan Stanley is especially concerned is retail property, as landlords are especially vulnerable to the Coronavius impact, which would further dampen already weakened retail sales.

Confirming Morgan Stanley’s concern that a bloodbath is coming to the retail sector, earlier today Reuters reported that some shopping mall landlords in Hong Kong, including Sun Hung Kai Properties, the city’s largest property developer, are offering relief measures such as rental concession to their tenants during the coronavirus outbreak.

Sun Hung Kai Properties, which owns major malls in some of the local districts that host international fashion brands ranging from Coach to Zara, said on Wednesday it would reduce February rent by up to 50% for most of its tenants, in an effort to stabilize economy and protect employment.

Separately, MTR Corp, which runs malls on top some of its subway stations, said it will adjust rent for small-medium companies, and after collecting the sales data of its international tenants, it will launch relief measures for them too.

Link Real Estate Investment Trust, whose tenants are mostly small to medium businesses, also said it has set up a HK$80 million relief scheme, which includes allowing rent payment in installments, waiving late payment interest and service charges, granting rent-free periods and reducing rents.

In short, Hong Kong’s retail sector, already battered by months of often violent anti-government protests, which has already sent retail sales into a worse contraction than during the financial crisis and China’s 2015/2016 market crash and devaluation…

… is on the verge of collapse with following the coronavirus outbreak in mainland China, which has emptied shopping centres and closed down tourist attractions, and will likely push countless CRE developers to the verge of bankruptcy.