- Emerging new wave of supply could cap office rental upside
- The COVID resurgence delays the border re-opening but not derail the retail sector recovery
- Low valuations to support landlords’ share price
- Preferred landlords: Swire Properties & Hongkong Land
Emerging new supply could cap office rental upside. After more than two years of correction, office market has exhibited signs of bottoming in 2H21. Central is the first submarket to resume positive rental growth with evidence showing corporates upgrade to prime office buildings taking advantage of softened rents and increased space availability. However, new wave of office supply will emerge in decentralised locations such as Quarry Bay and Kai Tak from 2022, and in Central from 2023. Current pre-commitment rate remains relatively low. Vacancy could rise again which could cap the rental recovery in 2022.
The COVID resurgence delays the border re-opening but not derail the retail market recovery. Prior to the recent resurgence of COVID cases, the retail sector has been on the road to recovery aided by improving domestic consumption. F&B operators become the mainstay of leasing demand. Rents for shopping malls rebounded slightly in 2H21 after falling for two years. The spread of Omicron should inevitably result in delayed border re-opening but not derail the retail market recovery. All considered, we project that retail rents to rise 5% in 2022. However, most of retail landlords should remain in the last leg of negative rental reversion cycle.
Stock recommendation. Property investors are trading at 53% discount to our estimated current NAVs on a weighted average basis, c.1.5SD below the 10-year means. Ongoing share repurchase should continue to support Hongkong Land’s share price. Valuation of Swire Properties is unjustifiably low. Any share repurchase could prompt further stock re-rating. Upgraded Wharf REIC to BUY from HOLD as the concern over the COVID resurgence should be largely discounted.