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Morgan Stanley's Hong Kong Property report highlights key challenges and recommendations for the sector based on November 2024 data and outlook for 2025.

Key Findings on Retail Sales:

• Retail sales decreased by 7% year-over-year in November, wider than the 3% drop in October and the market's expectation of a 5% decline.
• This deterioration is primarily driven by sharp declines in Chinese visitor arrivals (down to 55% of 2018 levels during November), offset by factors like Shenzhen's visa relaxations and RMB depreciation.
• Supermarkets were the only bright spot, recording +3.5% YoY growth. Luxury sales also showed a narrower decline but remained weak.
• The sales decline marks nine consecutive months of negative performance, and a 5% YoY expected in 2025 due to ongoing lower Chinese visitation and shifting spending patterns.

Stock Recommendations:

• Suggest Link REIT (OW) as preferred among retail landlords due to its stable earnings/dividend outlook.
• Retail-focused stocks (Wharf REIC - UW, Hysan - UW) are expected to underperform as their fundamentals face headwinds from declining foot traffic.
• Residential developers are favored over commercial landlords, offering better prospects than the retail sector.

Supporting Data and Visuals:

• Charts illustrate trends in total retail, luxury, and supermarket/footwear sales, showing declines compared to 2018 peaks.
• Navigational data shows HK residents increasingly departing to China (+39% YoY proxy), yet retail offline spending from locals is falling (down 28% YoY), indicating shifting consumption habits.
• Valuation metrics for REITs highlight Link REIT with higher dividend yield relative to US benchmarks.

Disclosure and Analyst View:

• Praveen Choudhary and Jeffery Mak authored the report, affirming their views while acknowledging potential conflicts.
• The broader retail sector is rated "In-Line," suggesting performance is expected to align with benchmarks but absent strong upside given external pressures.