Hong Kong's retail sales continue to outperform expectations, with October sales rising 6.9% year-on-year, marking the largest increase in 22 months. Luxury retail sales grew 9.5%, reaching a 21-month high. Citi highlights that diverted tourist flows from Japan to Hong Kong, coupled with the HKD's 4% depreciation against the RMB this year, are boosting retail performance through increased visitor spending. The bank remains optimistic about high-end retail landlords.

Citi notes strong luxury sales performance, positively impacting WHARF REIC (01997) and HYSAN DEV (00014). WHARF REIC derives 80% of recurring profits from Harbour City, while HYSAN DEV's retail tenants account for 50% of its portfolio, with expanding market share in Causeway Bay. Long-term, if China extends consumption taxes to luxury goods, consumers may shift purchases to Hong Kong for price advantages and convenience.

The bank observes mainland luxury mall operators upgrading tenant mixes, with high-end retail momentum persisting into Q3, October, and November—benefiting landlords like Hang Lung Properties (00101), Swire Properties (01972), and China Resources Mixc Lifestyle (01209). Citi attributes this growth to three factors: (1) low base effect from H2 2022; (2) positive wealth effects from strong capital markets; and (3) tenant mix upgrades to capture market share.

Citi introduces a new long-short strategy, recommending overweighting WHARF REIC while underweighting Link REIT (00823) due to diverging retail sales performance. With Christmas and Lunar New Year approaching, short-term data is expected to favor luxury sales.

Among Hong Kong landlords, Citi assigns Buy ratings to five stocks: HYSAN DEV (00014; target HK$17.35), Hang Lung Properties (00101; HK$10.1), Swire Properties (01972; HK$23.8), WHARF REIC (01997; HK$30.3), and Fortune REIT (00778; HK$5.56). Link REIT (00823) receives Neutral (HK$36.8), while Champion REIT (02778) is rated Sell (HK$1.4).