EUR 850.00 For Business Accounts Only

Morningstar | Swire Properties' Office Portfolio Steady but Retail Side Subdued

Swire Properties reported mixed and unexciting operating results for third-quarter 2018. In Hong Kong, the office portfolio at Pacific Place is largely unchanged from second quarter as there were few additional renewals during the quarter. Reversions for other office assets remained tepid at 6% to 7%. The aggregate occupancy rate retreated a bit to 99% at end of the quarter. The company announced it has signed leases for 100% of space at One Taikoo Place. The project will drive the company’s earnings in 2019, but we don’t expect it to see the similar degree of rental uplift as Pacific Place, owing to its location and supply availability. The asking rents ranged from HKD 50 to HKD 70 per square feet, in line with the rates seen at One Island East. We maintain our narrow moat rating and our fair value estimate of HKD 30.

On the Hong Kong retail side, retail sales were up 16% and 7%, respectively, at the tourist-driven Pacific Place and Citygate Outlets. The increases are more modest compared with previous quarters. For the non-discretionary-focused Cityplaza, retail sales for the quarter were up a respectable 6% year on year, owing to the reopening of the movie theater and revamped food and beverage outlets.

For the city as a whole, for the first nine months of the year, retail sales were up 11% year on year, continuing the recovery started March 2017. While there was a marked slowdown in September, with an anemic year-on-year increase of 2.4%, this was attributable to the impact of typhoon Mangkhut. Year-to-date tourist arrivals remained strong, up 10% year on year, with mainland tourists up 13%. Considering the strong recovery of the Hong Kong retail sector and tourism, the company's Hong Kong retail portfolio’s performance seem subdued. For the full year, we expect the portfolio to see a positive but small rental reversion, relative to the peak rental rates achieved in 2015.

Outside Hong Kong, retail assets in China saw continued growth. Mature properties Taikoo Li Sanlitun and Taikoo Hui Guangzhou logged retail sales gains of 12% and 11%, respectively, while the newer Taikoo Li Chengdu saw retail sales up 26% year on year, but sales growth flattened at Indigo. On the property trading side, the company has few projects in the pipeline at this point except for a mall redevelopment project. Further, the company put its serviced apartment project Taikoo Place Apartments up for sale, continuing to minimize its exposure to the elevated Hong Kong residential property sector.