Meeting takeaway: Navigating the challenges
- Flexible leasing strategy to attract office tenants
- Rental reliefs offered for affected retail and semi-retail tenants
- Slightly higher credit margins expected for loan refinancing
The recovery in the office market gathered momentum in 2H21. New letting demand was largely from local corporates including family offices and asset management firms. These firms usually look for offices of 4,000-5,000sf and prefer premises with internal fittings. Meanwhile, multi-national corporates remain cautious on office space demand amid border lockdown and economic uncertainties.
Moving into 1Q22, office leasing activities slowed down due to restrictions on office inspection along with the resurgence of COVID cases. Sunlight REIT has turned more flexible on its leasing strategy to secure tenants such as providing landlord provisions and introducing escalating rent clauses.
Spot rents for Dah Sing Financial Centre ranges from mid- HK$30s for low floors to low HK$40s for high floors. Negative reversionary growth is expected to remain in 2HFY22 which would put pressure on the passing rent (Dec-21: HK$43psf). However, with only 8.9% of its gross rental area scheduled for renewal in 2HFY22, the impact on overall rental income should not be material.
Tenants’ sales exhibited signs of improvement along with domestic consumption recovery in 2H21. F&B was a bright spot with sales receipts growing by >20% y-o-y. Jewellery trades saw a similar trend. This resulted in occupancy cost ratio trending down to a healthy level. During the period, new tenants at Metro City Phase I came from F&B, education, and property agency trades. Besides, car park income also improved across the board in 1HFY22. Carpark utilization rate at Dah Sing Financial Centre improved in 1HFY22 as Dah Sing Bank brought in more demand for monthly parking.
Overall, tenant retention exceeded 80% in 1HFY22 thanks to its defensive and balanced tenant profile.
In view of the resurgence of COVID cases, the Hong Kong government has retightened social distancing measures including dinner ban at 6pm, reducing maximum capacity for restaurants and mandatory closures for semi-retail tenants including education, gym, and beauty centers. As a result, footfall at Sunlight REIT’s retail properties was affected in Jan-22 and has further worsened from Feb-22 with COVID cases climbing and hitting another peak. Sunlight REIT will consider granting rental concessions to tenants, particularly those hit by mandatory closures and business restrictions.
About HK$2bn debt will mature in Jun-22. Sunlight REIT is in negotiations with banks for refinancing the remaining debt in addition to drawing a sustainability-linked loan of HK$500m in Feb-22. Credit margins, however, are expected be slightly higher.
Sunlight REIT continues to be on the lookout for acquisitions opportunities, preferably retail assets. In addition, the REIT do not rule out the possibility of asset disposals if they receive any attractive offers.