Company Update: COVID-led lockdowns weigh on residential earnings booking
In Hong Kong, office leasing activity had slowed upon the onset of the fifth wave of the pandemic but is showing signs of improvement after social distancing measures gradually eased in Apr-22. Physical vacancy of its Central office portfolio was 5.6% in Mar-22 (Dec-21: 5.2%). On a committed basis, the vacancy was 5%, up slightly from Dec-21’s 4.9%. About 18% of office leases are scheduled for expiry or subject to rent reviews in 2022. Given the number of deals already concluded, the vacancy level should remain stable this year.
According to Jones Lang LaSalle, office rents in Central improved slightly by 0.8% in 1H22, outperforming other submarkets. But reversionary growth of the company’s Central office portfolio should remain negative in 2022 given high expiring rents of HK$130psf.
The Central retail portfolio has suffered from lower tenants’ sales and foot traffic led by the COVID resurgence. In response to the COVID-led social distancing measures, Hongkong Land has provided modest temporary rental relief to its tenants, mainly in the F&B sector. This should drag retail rental income in 1H22.
The Singapore office portfolio fared better amid improving leasing sentiment, partly due to the gradual easing of travel restrictions. Higher rentals were achieved upon lease renewals or new lettings. With continued positive reversionary growth, average passing rent is set to increase further. Physical vacancy improved to 5.6% in Mar-22 from Dec-21’s 6.5%. The committed occupancy stood at 3.1%. (Dec-21: 2.9%)
Overall, Hongkong Land’s rental income should remain resilient in FY22. On the property development front, residential demand remains solid in Singapore despite cooling measure introduced in late 2021. This is evidenced by the sales response to the company’s launch of 407-unit Piccadilly Grand project in May-22. Overall, Hongkong Land achieved attributable contracted sales of US$45m in 1Q22. In Feb-22, Hongkong Land acquired a 49% stake in a residential site in Tanjong Katong area which will provide 640 units with a developable area of 0.59msf.
In China, residential sales momentum was subdued due to the COVID lockdowns. Hongkong Land’s attributable interest in contracted sales from China almost halved to US$213m amid cautious market sentiment in 1Q22.
Construction works was also impacted by the pandemic, particularly in Shanghai. The West Bund project was delayed for three months. Completion for Galaxy Midtown will be deferred to 2023 from late 2022. This would impact the delivery of the projects and hence result in the slippage of booking of residential profit.
Recently, a consortium in which Hongkong Land has a 34% stake acquired a residential site adjacent to the West Bund project in Shanghai for Rmb4.73bn.
Net debt rose to US$5.5bn in Mar-22 from Dec-22’s US$5.1bn, mainly due to scheduled payment of land premium for development projects acquired earlier. This translated into gearing of 16%. Even allowing for continued share repurchase and recent land bank purchase in Shanghai, the company’s financial risk remains well managed.
YTD, Hongkong Land has repurchased c.57.5m shares, bringing the cumulative number of shares bought back since Sep-21 to c.93.9m. We estimate the company has spent >95% of US$500m it earmarked for the share buyback program. Since the company announced its share buyback program in Sep-21, Hongkong Land’s share price has outperformed its peers. Meanwhile, the stock is trading at 57% discount to our assessed current NAV, c.1SD below its 10-year average. Valuation remains inexpensive. The current share buyback program is almost at an end. Whether or not the company will continue to repurchase shares after the program finishes could dictate the share price performance. By assigning larger target discount of 50% to our Jun-23 NAV estimate, we set our TP at US$5.95.