Company Update: Proactively pursuing new investments in Hong Kong and China
In Mar-22, spot office rents at One and Two Pacific Place were stable at HK$100-120psf while that of Three Pacific Place stayed at HK$90psf. However, rental decline upon lease renewal and new lettings should widen to 15-20% in 2022 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 are turning neutral. (2021:+10%). Other Taikoo Place office towers should register mildly negative rental reversion in 2022 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 in Mar-22. Income shortfall led by negative reversionary growth should be partly offset by new contributions from 8 Queen’s Road East in Wan Chai.
Flexible and office space provider IWG has agreed to lease 8 Queen’s Road East on en bloc basis and will open a “Spaces” centre in July. With total GFA of 81,346sf, this property has been vacant following the departure of WeWork in 2020.
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. This compared with 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. HKRI Taikoo Hui and Taikoo Li Qiantan was heavily hit due to the lockdowns in Shanghai. Impacts from the COVID resurgence on Sino-Ocean Taikoo Li Chengdu and Taikoo Hui, Guangzhou was less pronounced. Overall, tenants’ sales shortfall should translate into lower turnover rents but retail reversionary growth remains positive.
Two Taikoo Place in Quarry Bay is scheduled for completion in 2022. China CITIC Bank has reportedly pre-committed c.150,000sf at Two Taikoo Place, relocating from Devon House nearby. Including private bank Julius Baer, this soon-to-be-completed office property is c.30% pre-committed. Elsewhere, 46-56 Queen’s Road East in Wan Chai is slated for completion in 2023.
Swire Properties intends to invest over HK$100bn in the coming decade In Mar-22, Swire Properties teamed up with Xian Cheng Huan Cultural Investment and Development Co. to acquire a site in the downtown Xi’an. total consideration is Rmb2.6bn and Swire Properties has a 70% stake. With estimated GFA of 2.9msf, this retail-led mixed-use development is adjacent to the Small Wild Goose Pagoda (UNESCO World Heritage Site) and Xian Museum. Total investment cost is projected at Rmb10bn. Upon the scheduled completion in 2025, this will become the fourth Taikoo Li built by Swire Properties in China.
In Jun-22, Swire Properties secured a residential/retail site in Wan Chai via government tender for HK$1.96bn, within market expectations. This translated into accommodation value of HK$16,888psf. In recent years, the company has proactively replenished its residential land bank in Hong Kong. In 2021, Swire Properties concluded the land premium negotiation for Chai Wan bus depot site.
The Wan Chai site will be redeveloped into a residential/retail tower with total GFA of 116,186sf, which splits into 102,989sf for residential use and 13,197sf for retail purpose. It is about a 10-minute walk from Wan Chai MTR Station.
Adding construction and financing costs, we estimate total development cost at HK$29,000psf. Swire Properties has strong experience in developing high-end residential projects in Wan Chai. The company is currently developing Eight Star Street which has been largely pre-sold. Since its initial launch in Mar-21, Swire Properties has sold 28 units for HK$610m or HK$39,000psf on average. This represented 76% of total. The project is slated for completion with handover to buyers in 2H22. A complete sale should yield pre-tax profit of >HK$200m to Swire Properties.
In 1H22, Swire Properties consolidated the ownership of Zungfu Industrial Building in Quarry Bay which will be redeveloped with the neighouring Wah Ha Factory Building. Elsewhere, the company has applied for compulsory auction of two residential properties on Hoi Wan Street in Quarry Bay. The company has been taking initiatives to expand its Taikoo Place portfolio.
To support more acquisitions without stretching its balance sheet, Swire Properties has been realizing the value of non-core assets. In 1H22, the company sold c.130 car parks in the Taikoo Shing residential development and plans to sell the remaining 1100 car parks. This not only spices up the bottom-line earnings but also provides capital for making new investments for long-term growth.
The stock, trading at 63% discount to our assessed current NAV and 5.3% dividend yield for FY22, is attractively valued. The company has been proactively pursuing new investments in China and Hong Kong which should lay down a solid foundation for long-term earnings and dividend growth. This should justify a higher valuation over the long run. By assigning a 50% discount to our Jun-23 NAV estimate, we set our TP at HK$25.35. BUY