Damage to Hong Kong's Festival Walk mall prompts credit rating outlook cut for Singapore Reit

In a photo from Nov 13, 2019,  a person tries to extinguish a burning Christmas tree after protesters set fire to it at Festival Walk shopping mall in Hong Kong.
In a photo from Nov 13, 2019, a person tries to extinguish a burning Christmas tree after protesters set fire to it at Festival Walk shopping mall in Hong Kong.PHOTO: EPA-EFE

SINGAPORE - Credit rating agency Moody's Investors Service has lowered its outlook on Singapore-listed Mapletree North Asia Commercial Trust (MNACT) to negative from stable.

The downgrade reflects the uncertainty surrounding the earnings and operating performance of MNACT's largest asset, the Festival Walk mall in Hong Kong, said Jacintha Poh, a Moody's vice-president and senior credit officer.

The mall in the Kowloon Tong area has been closed after sustaining extensive damage during violent clashes across the city last week. Anti-government protesters smashed glass panels at Festival Walk's entrances, including the office lobby and balustrades on various levels of the mall. The protesters also set fire to the Christmas tree within the shopping centre as well as the office lobby.

On Tuesday, the Singapore-based real estate investment trust (Reit) said recovery works are ongoing, while insurers have been notified and claims are being assessed.

MNACT has not announced a planned reopening date for the property.

The mall's closure highlights the vulnerability of MNACT's credit quality because of its reliance on a single asset for some 60 per cent of its revenue and net property income for the 12 months ended Sept 30, 2019, Ms Poh said.

While Festival Walk is covered by insurance for damages and loss of income, uncertainty exists around the extent of coverage as well as the operating performance of the property after it reopens, she noted.

Any direct impact from a decline in Hong Kong retail sales on MNACT's overall revenue will likely be muted, Moody's said. This is because Festival Walk derives most of its rental income from base rent. Turnover rent - which is pegged to retail sales - contributed only 3 per cent of the mall's revenue for the fiscal year ended March 31, 2019.

However, if expiring leases are not successfully renewed or re-let at current rental rates, base rents will be hurt by a contraction in retail sales coupled with Hong Kong's weak economic growth, Moody's said. The mall had a weighted average lease expiry (by gross rental income) of 2.5 years as at Sept 30.


Meanwhile, Moody's affirmed the Baa1 issuer rating of MNACT. This is because the rating agency expects that the damages and loss of income at Festival Walk will be sufficiently covered by insurance. The Reit's assets in China and Japan are also bringing stable and recurring income, and MNACT will have "excellent" liquidity over the next 12 months, Moody's said.

Moody's also affirmed the provisional (P)Baa1 senior unsecured rating on the euro medium-term note programmes of MNACT and two of its wholly-owned subsidiaries: Mapletree North Asia Commercial Trust Treasury Company (S) Pte Ltd and Mapletree North Asia Commercial Treasury Company (HKSAR) Limited.

It affirmed the Baa1 backed senior unsecured rating on the notes drawn down under the Hong Kong treasury company's euro medium-term note programme as well.

The downgraded outlook by Moody's applies to all the aforementioned ratings.

MNACT's portfolio consists of nine properties located in Hong Kong, China and Japan, with a total appraised value of around $7.7 billion as at Sept 30. The trust's sponsor is Mapletree Investments Pte Ltd., a wholly owned subsidiary of Temasek Holdings.

MNACT fell 0.9 per cent or one cent to $1.14 on heavy volume of 11.9 million units as of 1:04pm on Friday.