Hong Kong shopping centre landlord Wharf Reic reports 10 per cent increase in first-half revenue, rues absence of tourists

We see downward pressure on rents in the second half for us, chairman Stephen Ng says
‘What we – and the retailers – lack right now is tourist consumption’

Hong Kong property

Lam Ka-sing

Published: 7:30am, 6 Aug 2021

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Although retail sales might have bottomed out in Hong Kong, rental incomes will remain under tremendous pressure until border controls are relaxed, according to Wharf Real Estate Investment Company (Reic), the owner of shopping centres Harbour City and Times Square.

Vacancies and weaker market rents continued to depress rental incomes, the company said in a results filing to the stock exchange on Thursday.

“To landlords, this is obvious. Retail rents in the market have been falling gradually,” Stephen Ng, chairman and managing director of parent company The Wharf Group, said during the results briefing. “Now that old leases are gradually expiring, there are more new leases. So our rental income has changed to the level of new leases, to fit the market level. The adjustment is not over, so we see downward pressure for rents in the second half for us.”

The absence of tourist spending has hurt the city’s retailers, who have seen sales rise this year, but still remain some way off levels seen two years ago, before Hong Kong was rocked by anti-government protests, the US-China trade war and the coronavirus pandemic. So while things are looking up, retailers cannot afford to pay shopping centre landlords the high rents of yesteryear.

Wharf Reic’s revenue in the first half of this year rose 10 per cent year on year to HK$7.49 billion (US$963 million). Its underlying net profit for the period dropped 15 per cent to HK$3.27 billion. Taking valuation into account, its net profit amounted to HK$2.97 billion, compared with a loss of HK$4.45 billion last year. An interim dividend of 67 Hong Kong cents will be paid, it said. The company’s stock dropped 3.6 per cent to HK$38.8 on Thursday.

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Ng pointed out that the worst was over for retailers, thanks to better sales and lower rents. They had benefited from the government’s consumption vouchers and a good performance by the city’s athletes at the Tokyo Olympics, which had boosted sentiment, footfall and sales recently. The year-on-year growth in sales was high, because of last year’s low level.

But sales had not yet recovered to levels seen two years ago, he added. “What we – and the retailers – lack right now is tourist consumption. As long as the border is not reopened, there will be no tourist consumption.”

A full opening will take place only later this year or the next, which will weigh on retailers, Ng said.

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Overall shopping centre rents in the second quarter of this year were down 10.2 per cent year on year and 45.2 per cent from a peak seen three years ago, according to Savills.

“Rents are close to bottoming out after a long period of adjustment since 2014. For rents to rise, borders [reopening] are key and the return of mainland spending,” said Simon Smith, regional head of research and consultancy in Asia-Pacific at Savills. Many multinational brands, especially fashion brands, had frozen their budgets for expansion this year, which had inevitably contributed to slower take-up, he added.

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