Lull in China’s economy to hurt HK’s commercial property sector

With 35% of Hong Kong’s total retail sales coming from mainland Chinese visitors, the city-state is bound to suffer if China’s economic woes continue.

Fitch Ratings said in a report that Hong Kong’s commercial property market will bear the brunt if the Chinese economy continues slowing down.

Any lull in the Chinese market is seen to have “an adverse impact” on Hong Kong since the city-state has close links with the mainland.

Specifically, Fitch pointed out that “a sharp cutback in spending would weaken tourism activities - which would in turn have a negative impact on retail properties…significantly dampen investment spending; and prolong the recovery of the office sector.”

Despite sounding the alarm, the ratings agency expects its rated Hong Kong property firms to maintain a steady credit profile in 2012, supported by strong leverage and a healthy liquidity profile. 

“As lease tenure is typically three years, cashflow among these property companies will be protected by rental rates locked in at an earlier point. An expected upward revision in rental rates would also continue to support the rental income stream for leases expiring in 2012” it said. 

Within the commercial property space, the agency sees the retail sector staying resilient, while weak spot rental rates would be mitigated by positive rental reversion in the office sector.

For 2012, positive growth is expected in spot retail rental rates - underpinned by retail sales particularly from the tourism sector; tight supply in prime areas; and activity in outlet expansion among local and foreign retailers.

Spot office rentals should contract, however, as demand will be dampened by corporate downsizing and as businesses hold back expansion amid a weaker operating environment, Fitch noted.

In 2011, both retail and office rental rates escalated to record highs, driven by favorable market fundamentals including strong retail sales and limited new supply in prime areas.