Company Update: Resilient office portfolio, improving retail scene
Dah Sing Financial Centre is seeing more leasing enquiries lately, mainly driven by corporates seeking for consolidation or relocation options within the Wan Chai/Causeway Bay precinct. Nonetheless, transactions have been limited and were primarily highlighted by small-sized tenants. In 2Q23, a homegrown co-working space operator, theDesk, has expanded its footprint by leasing one floor at Dah Sing Financial Centre. This should push up the property’s occupancy from Mar-23’s 87.1%. While negative rental reversion is still working its way through, the property should see stable rental income in the near term as only 5.7% of leases are up for renewal in 2HFY23.
Meanwhile, Grade B offices continued to benefit from solid demand from SMEs and service trade tenants. Occupancy at Strand 50 is expected to improve from Mar-23’s 89.6%, thanks to in-house expansion of existing tenant which partially filled up the space vacated by theDesk in early 2023. Winsome House in Central should also see higher occupancy due to the recruitment of a new tenant. This should help support a recovery in portfolio occupancy. Aided by positive rental reversions from service trade tenants, reversionary growth for leases expiring in 2HFY23, accounting for 17.1% of the office portfolio’s gross rental area, should narrow from 1HFY23’s -4.5%.
Scheduled for completion in Jul-23, renovation work at Metro City Phase I (MCPI) has been substantially done. With a capex of <HK$20m, the enhancement work includes the reconfiguration of shop layout on the upper floor and refurbishment of common facilities. This has inevitably caused disruption on footfall recovery at MCPI. Nevertheless, tenants’ sales have seen a meaningful rebound amid the normalisation of social activities, especially for F&B.
Thanks to the return of Mainland tourists following the border re-opening, footfall at Sheung Shui Centre Shopping Arcade (SSC) has seen double-digit growth. The improved retail scene has also prompted the return of high margin trade tenants at SSC, and hence, bodes well for the property’s near to medium term rental outlook. Overall, tenant sales recovered on par with that of Hong Kong retail market.
With occupancy cost ratio edging down to a healthier level, we are seeing positive rental reversions from selected tenants at Sunlight REIT’s retail portfolio. On the other hand, property agencies suffered from subdued residential demand and hence rental had declined upon lease renewals. Overall, we forecast retail reversionary growth to improve from 1HFY23’s -4.8%.
Sunlight REIT has concluded the refinancing plan for the HK$300m loan that matured in 2Q23. Despite new IRS entered in 2Q23, Sunlight REIT’s hedging ratio should fall slightly from Dec-22’s 55.8% after drawing a new loan to finance the acquisition of West 9 Zone Kids in 1H23.
Sunlight REIT offers distribution yields of 7.7-7.1% for FY23-24F, translating into yield spreads of 4.0-3.4%. Despite headwinds over the office market, Sunlight REIT’s office portfolio should demonstrate resilience as underpinned by solid demand for Grade B office space. Its retail portfolio is well poised to capture the Hong Kong retail market recovery led by improving economic outlook and inbound tourism. Maintain BUY with DDM-based TP of HK$3.57.