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Occupy Central has limited impact on HK landlords, says Deutsche Bank

October 7, 2014 2:30 PM SGT

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SINGAPORE (Oct 7): The pro-democracy demonstration in Hong Kong is not expected to hurt landlords as the turnover rent they collect from tenants makes up only a small portion of their total rental, says Deutsche Bank.

Turnaround rent is calculated as a proportion of the annual sales generated by a business and usually does not fall below a base rent.

While some retailers in areas where the protestors have gathered have had to shut down their operations temporarily, the impact on landlords is limited as turnover rent is “insignificant” to most of them, according to Deutsche Bank analysts Tony Tsang and Jason Ching.

“Generally speaking, turnover rents make up just 3% to 10% of total rental revenue, implying that the overall impact to total rental revenue is relatively mild up to this point,” they said in a note.

This is not the case, however, for Wharf Holdings, Swire Properties and Great Eagle Holdings, as turnover rents account for as much as 25%, 20% and 15% of their total rental respectively, they said.

Beyond rental, the impact of the so-called Occupy Central movement on the net asset value of Hong Kong landlords is much greater, they added.

Property group Hysan, in particular, is the most at risk as all of its retail assets are located in the areas affected by the protests.

Great Eagle Holdings, too, is vulnerable as 92% of its retail portfolio lies in the affected areas.

Overall, the fallout from the demonstration will not be substantial for landlords in the near term, according to Tsang and Ching.

“While we are increasingly concerned about the outlook for the Hong Kong property market and expect a sizeable correction in property prices in 2015, we still prefer developers over landlords or those with good exposure to China so as to offset weakness in Hong Kong.”

Deutsche Bank’s top picks are Cheung Kong Holdings, Wharf Holdings, SHK Properties, New World Development and Sino Land.

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