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Hong Kong Visitor Curbs May Weigh on Mall Owners’ Profits

Hong Kong may lose as much as HK$25 billion ($3.2 billion) in retail sales if the government goes ahead with a proposal to cut Chinese tourist arrivals, according to Goldman Sachs Group Inc.

The proposal, under consideration by Hong Kong Chief Executive Leung Chun-ying, will put pressure on the earnings and asset values of landlords and retailers, analysts including Macquarie Group Ltd. and Bank of America Corp.’s Merrill Lynch & Co. unit said.

Public discontent over mainland visitors’ purchases of homes, designer handbags and daily necessities prompted street protests in Hong Kong this year that demanded the government limit arrivals. Curbs on visitors in response may crimp the city’s retail sales, about a third of which were to Chinese tourists in 2013.

“Leung’s words should serve as prelude for some upcoming measures to curb the surging number of Chinese visitors, which should help ease both the burden on public infrastructure and the growing tensions between the mainland Chinese and local residents,” Credit Suisse Group AG analyst Christiaan Tuntono wrote in a report today.

Hysan Development Co., operator of its name-sake mall, is among companies with the most earnings at risk, Macquarie analysts wrote. Merrill Lynch downgraded Wharf Holdings Ltd., a commercial landlord, to neutral from buy. UBS AG today removed Lifestyle International Holdings Ltd. and Sa Sa International Holdings Ltd. from its Hong Kong most-preferred list and added Wharf to the least-preferred list.

Average rents in Hong Kong’s main shopping districts may decline 5 percent in the next 12 months, property broker Colliers International said earlier this month.

Chinese Shoppers

Visitors from the mainland accounted for 75 percent of Hong Kong’s 54.3 million arrivals in 2013, according to the Tourism Commission. Total arrivals jumped 12 percent last year, the fourth consecutive year of double-digit gains.

Hong Kong may take steps to slow gains in tourist arrivals as an influx of Chinese visitors stokes discontent, Leung said yesterday after the Hong Kong Economic Times reported he sought advice about a proposal to cut mainland visitors by 20 percent. The government is conducting studies and will seek public feedback, he said.

A 20 percent cut in the individual visit visa granted to the Chinese will trim retail sales in Hong Kong by 3 percent to 5 percent, according to Goldman Sachs. Chinese tourists spent HK$217 billion last year, Goldman Sachs said.

Wharf Malls

Wharf and Sunlight Real Estate Investment Trust will suffer the most on their net asset values from falling Chinese tourist spending, Macquarie said.

Mainland visitors account for about 50 percent of spending at Wharf’s Harbour City mall, and about 35 percent to 40 percent at Times Square, Merrill Lynch analyst Karl Choi wrote in a note yesterday. A worst-case scenario would see an 8 percent to 10 percent drop in sales if visitors’ spending were cut by 20 percent, reducing Wharf’s turnover rent, it said.

It will be “difficult for Wharf shares to outperform until any policy change is implemented and the impact on retail sales clarified -- a process that may take some time,” Choi wrote. “Once the dust settles after the next few months, we think investors may be willing to reassess.”

The city’s Causeway Bay district was ranked the world’s most expensive shopping location for rents in 2013, ahead of New York’s Fifth Avenue, according to data compiled by Bloomberg. It cost retailers $3,017 a square foot in the district, data shows.

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