Hong Kong's overall retail sales slipped by 2.7%

Market's asset value has dropped massively by 29%.

In the retail space, it has been noted that Wharf and Hysan’s valuations suggest that retail rents could be down 29% in 12 months.

According to a research note from Barclays, at first glance, this appears to be much wider than the 2.7% decline in overall retail sales.

But if one were to simply focus on the discretionary items (jewellery, fashion & department stores), the report said, their sales decline has widened from 9% at the start of 2015 to 16% now.

If the current pace of a 0.83ppt monthly deterioration is maintained, the expectation gap in retail is also not that far off, said the report.

Here's more from Barclays:

When we turn to the retail market, we find a similar picture. Thus far, through the first nine months of 2015, Hong Kong’s overall retail sales have dropped by -2.7% y/y. For the retail landlords, considering that their current discount to NAV and PB are some 21ppt and 35% below their long-run average and Hong Kong property companies’ gearing is about 12%, we can reason that the market has priced in a 29% decline in their asset value.

At first glance, this may suggest a big expectation gap between stock and physical. However, the overall retail sales figure actually masked a steeper pull-back in the discretionary spending category where “jewellery and watches”, “clothing & footwear” and “department stores” have declined by 14.7%, 6.1% and 3.0% respectively in 9M15.

We believe this added level of granularity is important as fashion, leather goods, department stores and jewellery/cosmetics contribute much more to rental income than other categories to retail landlords. Take Wharf’s Harbour City and Times Square for instance, where these four categories collectively make up 88% and 80% of their rental base.

Unlike the residential sector where we can look at weekly sequential changes, given the seasonality of retail sales, the year-on-year changes are probably more representative. While the pace of retail sales declines had gradually widened from -2.0% at the start of 2015 to -6.4% as at September 2015, this is still much milder than stock prices are suggesting.

In 2015 to date, the rate of decline has widened by approximately 0.54ppt each month. If this pace were to continue, this would suggest retail sales should be down 13% over the next 12 months, still milder than the 29% that retail landlords’ share prices are suggesting.

If we were to focus on only the three key discretionary spending categories mentioned above, we find the pace of decline has gone from -8.9% at the start of 2015 to -15.6% in September, with an average monthly deterioration of -0.83ppt.

Keeping this trend, this would suggest that these three discretionary spending categories could be down 26% in 12 months time. On stocks, they have been pricing in a 29% y/y decline in the next 12 months. Even if we get a two-year view, as long as the annual decline is no more than 16%, this could also present a “less bad” outcome as well.