Hong Kong retail landlords may need to slash rents to avoid risks of dampened occupancy, especially as mainland China offers more attractive options for customers, according to a Wednesday report from S&P Global Ratings.

Landlords could go for reductions between 5% and 10% on new leases this year to keep tenants, according to the rating agency.

However, declining occupancy poses a greater threat to landlords than rent reductions, with the former potentially hurting their EBITDA, debt levels, and property values, S&P said.

A 10 percentage point drop in occupancy, along with the rent cuts, could significantly weaken leverage, according to S&P's stress tests.

Shifting consumer behavior stems from easier and growing cross-border travel, cheaper goods and services in mainland China, and the rise of cross-border e-commerce deals, the rating agency said.

Moreover, potential asset devaluations due to falling rents and weak markets could further strain balance sheets, which should have been a credit strength, according to the rating agency.