News analysis : Challenging times
- Office rental reversion has deteriorated
- COVID resurgence is taking a toll on mall operations in Hong Kong and China
- BUY for attractive valuation with HK$25.8 TP
In Dec-21, spot office rents at One and Two Pacific Place remained stable at HK$100-120psf while that of Three Pacific Place stayed at HK$90psf. However, rental decline upon lease renewal and new lettings widened to 18% in 1Q22 from 2021’s 4% as the leases up for expiry were signed at the previous market highs three years ago. Reversionary growth at One Island East and One Taikoo Place turned neutral in 1Q22 (2021:+10%). Other Taikoo Place office towers registered mildly negative rental reversion of 3% given high expiring rents. This was despite steady office rents. Office occupancy at Pacific Place and Taikoo Place remained firm at 98% and 97% respectively. Income shortfall led by negative reversionary growth should be partly offset by new contributions from 8 Queen’s Road East in Wan Chai which was entirely leased to IWG after being vacant for more than one year.
Due to a deteriorating retail scene led by the spread of the Omicron variant, tenants’ sales at Pacific Place Mall and Cityplaza fell 9.1% and 10.4% respectively in 1Q22, more than the overall retail sales decline of 7.6% during the same period. Citygate Outlet Mall fared worse with heavier tenants’ sales decline of 21.3%. However, with the gradual relaxation of social distancing measures after the COVID outbreak was brought under control, tenants’ sales should see a nice sequential recovery in 2Q22.
In China, Taikoo Li Sanlitun in Beijing, Taikoo Hui in Guangzhou, INDIGO in Beijing and Sino-Ocean Taikoo Li in Chengdu recorded retail sales declines ranging from 3.3% to 11.9% due to the COVID resurgence. HKRI Taikoo Hui in Shanghai was heavily hit with tenants’ sales tumbling 27% due to the lockdowns. These should translate into lower retail turnover rents. Newly completed Taikoo Li Qiantan in Shanghai was 90% committed as of Mar-22 (Dec-21: 90%).
Swire Properties is beefing up its rental portfolio in Hong Kong and China. Two Taikoo Place in Quarry Bay is scheduled for completion in 2022 while 46-56 Queen’s Road East in Wan Chai is slated for completion in 2023. In China, INDIGO Ph 2 is expected to come onstream from mid-2025 while Taikoo Li Xian is targeted for completion in 4Q25.
Trading at 63% discount to our appraised current NAV and 5.2% dividend yield for FY22, the stock remains attractively valued even allowing for operational challenges. BUY