Company Update: Portfolio rejuvenation comes close to an end
- Rejuvenation works at Hysan Place and Lee Garden Hub close to completion
- Positive retail rental growth expected on renewals in FY24
- Office rental reversion to stay negative in FY24
- Maintain BUY despite lower TP of HK$17.70
The basement floors (B1&2) at Hysan Place have reopened for business in mid Dec-23 following an extensive renovation. Previously occupied by T-Galleria and Market Place, the newly renovated area is subdivided into small units which are largely committed by F&B and light refreshment shops. Elsewhere, enhancement work at Lee Garden One is close to completion. The enhanced area should house high-yielding international luxury brands upon scheduled reopening in 1Q24. This should further reinforce Lee Garden hub’s leading position as high-end shopping destination for affluent customers, tourists and locals alike.
Retail occupancy currently stands firm at c.98%. Tenant sales at Hysan Development’s retail portfolio continued to gain momentum in 2H23, primarily led by robust sales from luxury and cosmetics tenants. Excluding area under renovation, overall tenants’ sales has recovered to c.85% of pre-COVID level. This should underpin positive reversionary growth upon the renewal of leases expiring in 2024, which accounts for c.31% of total retail area.
Leasing sentiment remained subdued as multinational firms put expansion plans on hold amid global macro uncertainties. Most leasing transactions were driven by small-sized tenants particularly from fintech start-ups or healthcare companies. Hysan Development’s office portfolio occupancy has softened slightly from Jun-23’s 89%. Overall, office reversionary growth should stay negative in FY23.
In FY24, about 20% of office area is scheduled for roll over, with expiring rent marginally higher than that of FY23. In view of the prevailing market sentiment, we expect negative rental reversion to persist.
Occupancy at Bamboo Grove in Wan Chai remained at around 60% amid intense market competition. Lower rents are recorded upon lease renewals and new lettings, thus dragging near-term residential income.
Since Jul-23, Hysan Development has sold 22 units at Villa Lucca in Tai Po, a 60/40 JV with HKR International, for an aggregate amount of HK$538m or c.HK$16,800psf on average. Since its initial launch in Aug-22, 44 units have been sold for HK$1.08bn or c.HK$17,400psf on average. This represented c.17% of a total 262 units.
In the past six months, share price of Hysan Development has fallen by 23%, underperforming the broad market by 8%. Meanwhile, the stock is trading at 79% discount to our current assessed NAV, >2SD below its 10-year average of 54%. While investors’ concerns over potential dividend cut could pose an overhang to the stock, the current low valuation should limit any further downside risk. Fresh contribution from the renovated area should underpin retail rental income recovery with positive reversionary growth to further add momentum. This should more than offset office income shortfall from office portfolio, pointing to gradual rental earnings improvement in the near term. Rejuvenation at the Lee Garden Hub should solidify its position as a leading retail property play within the precinct. Maintain BUY, despite lower TP of HK$17.70. This is premised on a target discount of 72% to our Dec-24 NAV estimate.