Hong Kong retail sales moderated in April, while rental reversion for retail landlords has yet to improve

Overview

This report tracks retail sales performance related to Hong Kong commercial property. Hong Kong retail sales grew 9% year over year in April, slowing from 13% in March; excluding unusually strong growth in autos and electrical goods, overall retail sales growth was 6% year over year. JPMorgan believes that the stabilization in retail sales has not yet translated into stable or positive rental reversion for the major Hong Kong retail landlords Link REIT and Wharf REIC, and therefore maintains a Neutral rating on both.

Core views

The core view is that Hong Kong retail sales remain in a modest recovery range, but momentum slowed versus March and still trails the 2015-18 average level. Essential goods retail continues to post mid-single-digit growth, while discretionary consumption, though relatively stronger, has also slowed. Limited improvement in inbound visitor arrivals, a higher base in the second half, and rising cross-border e-commerce penetration constrain the scope for further meaningful improvement in retail sales. For equities, Link REIT has greater upside risk than Wharf REIC due to its higher dividend yield and potential capital recycling, but current evidence is insufficient to support a shift to a more constructive rating.

Analysis framework

The report evaluates Hong Kong retail trends using year-over-year retail sales growth, adjusted metrics excluding outlier categories, comparisons with the 2015-18 average level, and category-level sales performance, and maps these trends to tenant sales, rental reversion, and valuation implications for major Hong Kong retail property landlords.

Methodology notes

• Industry data trackingYear-over-year growth versus 2015-18 average comparison

  Use current year-over-year retail sales performance and the gap versus the pre-pandemic average to judge the quality of the recovery.

  Retail sales grew 9% year over year in April, but remained 15% below the 2015-18 average; this suggests that the year-over-year improvement is still influenced by a low base, while absolute levels have not fully recovered.

• Outlier adjustmentRetail growth excluding autos and electrical goods

  Exclude highly volatile categories to observe more sustainable retail momentum.

  Autos rose 46% year over year and electrical goods rose 22% year over year, lifting the overall data; excluding these, overall retail sales in April grew 6% year over year, below 8% in March.

• Equity impact mappingTransmission from tenant sales to rental reversion

  Changes in retail sales need to feed through to tenant sales and rental reversion before directly improving earnings for retail landlords.

  The report believes that stable retail sales have not yet translated into positive or stable rental reversion for Link REIT and Wharf REIC, so stock ratings remain Neutral.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Link REIT (0823.HK)

  A proxy Hong Kong retail landlord; supermarket sales can serve as a reference for its tenant sales.

  Strengths

  A dividend yield above 6% provides income support, and potential capital recycling could bring upside risk.

  Weaknesses

  The stabilization in retail sales has not yet translated into stable or positive rental reversion; essential goods retail is only maintaining mid-single-digit growth.

  Comparison

  Compared with Wharf REIC, the report believes Link REIT has more upside risk.

  Risks

  Rising cross-border e-commerce penetration, limited visitor recovery, and continued weak rental reversion.

• Wharf REIC (1997.HK)

  A Hong Kong core retail property landlord, more heavily affected by discretionary consumption and tourist spending trends.

  Strengths

  Discretionary consumption and jewelry/valuable gifts are still growing year over year, helping support demand for high-end retail-related properties.

  Weaknesses

  Year-over-year growth in discretionary consumption slowed markedly from March and remains 27% below the 2015-18 average.

  Comparison

  Relative to Link REIT, the report does not identify similar additional upside support from a high dividend yield or capital recycling.

  Risks

  Slowing discretionary consumption momentum, a higher base in the second half, and no improvement in rental reversion.

• Pinduoduo (拼多多) / PDD HOLDINGS INC

  A representative of rising cross-border e-commerce penetration, creating competitive pressure on Hong Kong offline essential goods retail.

  Strengths

  Rising cross-border e-commerce penetration indicates stronger platform appeal to Hong Kong consumers.

  Weaknesses

  The report does not provide a rating or valuation view on PDD and mentions it only as a factor affecting Hong Kong's retail structure.

  Comparison

  Compared with offline retail landlords, Pinduoduo represents the migration of consumption channels toward cross-border e-commerce.

  Risks

  This factor is negative for Hong Kong retail landlords, but the investment implications for PDD itself require separate analysis.

Key data

• Hong Kong April retail sales+9% Y/YSlowed from +13% in March; 15% below the 2015-18 average.
• Overall retail excluding autos and electrical goods+6% Y/YMarch was +8% Y/Y, indicating a modest slowdown in underlying retail momentum.
• Essential goods retail+5% Y/YFlat versus March and roughly in line with the 2015-18 average; expected to maintain mid-single-digit year-over-year growth in the coming months.
• Discretionary retail+13% Y/YSlowed from +22% in March; +8% Y/Y excluding outliers.
• Jewelry and valuable gifts+20% Y/YSlowed from +28% in March; the report believes this may be related to lower gold prices.
• Consumer durables+26% Y/YMainly driven by autos and electrical goods, making it a strong-performing category in April.
• Fuel and department storesFuel -12% Y/Y; department stores -7% Y/YBoth categories declined year over year and were among the weaker performers in April.
• Supermarket sales+3% Y/YCan serve as a proxy indicator for Link REIT tenant sales; up about 2% year to date.
• Inbound visitor arrivalsMay +9% Y/YApril was +10% Y/Y, with no particularly significant improvement.
• Retail sales outlook for the coming months+5% to +10% Y/YThe report also notes that the base will rise in the second half of the year.
• Link REIT dividend yield>6%The report believes this, together with potential capital recycling, gives Link REIT relatively greater upside risk.

Impact & implications

For Hong Kong retail property landlords, the current data support the view of 'stabilizing sales but no clear improvement in rents yet.' Moderate industry growth is insufficient to immediately drive rating upgrades; the investment implication is more about waiting for rental reversion improvement, faster visitor recovery, or realization of capital recycling. Link REIT offers relatively better defensiveness and upside potential due to its dividend yield and asset disposal/reinvestment potential, while Wharf REIC remains more dependent on improvement in high-end retail and core mall rents.

Risks

• A lack of meaningful acceleration in inbound visitor recovery may limit further improvement in retail sales.
• A higher base in the second half may depress year-over-year growth.
• Rising penetration of cross-border e-commerce, especially Pinduoduo, may weigh on growth in Hong Kong local essential goods retail.
• Stabilizing retail sales may not necessarily feed through to rental reversion, creating a risk that earnings improvement for property landlords is delayed or fails to materialize.
• Jewelry and valuable gift sales are affected by gold price movements; if gold prices trend unfavorably, related retail growth may continue to slow.
• Year-over-year declines in fuel and department stores show that demand in some categories remains weak.

What to watch

• Whether Hong Kong retail sales maintain the 5%-10% year-over-year growth range in the coming months.
• Whether inbound visitor arrivals from May onward improve meaningfully versus the roughly 9%-10% year-over-year growth seen in April and May.
• Whether essential goods retail continues to maintain mid-single-digit growth, and whether cross-border e-commerce penetration rises further.
• Whether divergence widens across categories such as discretionary consumption, jewelry and valuable gifts, autos, and electrical goods.
• Whether tenant sales, lease renewal rental reversion, and management guidance for Link REIT and Wharf REIC improve.
• Progress in Link REIT's capital recycling and the sustainability of its dividend yield above 6%.