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RETAIL | Staff Reporter, Hong Kong
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Will Hong Kong's property firms survive the retail market's downtime?

Muted GDP growth rates add more pressure.

Moody's Investors Service says that Hong Kong property companies rated by Moody's with meaningful revenue exposure to the territory's retail market will maintain their credit quality and ratings.

According to a release from Moody's Investors Service, this is despite the pressures resulting from muted domestic GDP growth rates. "This resilience reflects the companies' strong business and financial profiles, and diversified operations," says Stephanie Lau, a Moody's Assistant Vice President and Analyst.

"The companies' long track records of operating quality retail properties with high occupancy rates and high overall EBITDA margins, driven by prime asset quality and management, provide a solid financial cushion against macro headwinds," adds Lau.

Here’s more from Moody's Investors Service:

Moody's analysis is contained in its just-released report titled "Property -- Hong Kong: Rated Hong Kong Property Companies Can Withstand Macro Headwinds," and is authored by Lau.

Moody's report says that the rated companies' retail portfolios will remain resilient despite slowing retail sales, because of the companies' well-staggered lease expiries, focus on maintaining base rental rates and diversified tenant mixes. In particular, the companies' retail occupancy rates should remain stable, unless economic conditions deteriorate dramatically and for a prolonged period.

Hong Kong retail outlets will likely face slower footfall because of the 12.5% year-on-year decline in Hong Kong's retail sales during Q1 2016, according to the Census and Statistics Department. However, we expect the weakening in retail sales performance to affect rents for prime-street shops more than shopping malls, to which our rated property companies have exposure.

Moody's also expects that the low vacancy rates and tight supply of Hong Kong's Grade-A office market will support the overall rental stability of Moody's-rated companies. On a weighted-average basis, Moody's expects that the companies' adjusted debt/EBITDA will increase slightly to 3.6x in 2016 versus 3.5x in 2015, and their adjusted EBITDA/interest should hold steady at 9.0x.

As for liquidity, the companies demonstrate adequate liquidity, owing to their manageable debt maturity profiles, healthy cash positions and stable operating cash flow. Moody's says the companies' rental income and/or cash from operations will cover their short-term debt obligations, dividend payments and capital expenditures over the next 12 months. Most companies also benefit from support from unused committed banking facilities.

As a result, the rated companies will maintain their investment-grade ratings and stable outlooks during the coming 12-18 months—barring unexpected circumstances—owing to the limited impact on their financials and credit metrics from Hong Kong's sluggish retail environment and the cushion within their ratings.

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