EUR 850.00 For Business Accounts Only

Morningstar | Swire Properties' 2Q Operating Results Mixed

Similar to first-quarter 2018, Swire Properties reported mixed operating results for second-quarter 2018. In Hong Kong, the office portfolio at Pacific Place continued to perform very well, with the renewal of nearly 162,000 square feet. Rental reversions were up 25%, compared with 15% and 12% seen during the same period in 2017 and 2016, owing to the continued spill-over effect of a very tight Central office market. However, reversions for other office assets were not as robust. Taikoo Place saw renewal of over 800,000 square feet at 5% positive reversion. The aggregate occupancy rate climbed to 100%, up from 99% at end of 2017. The demand for office space at Taikoo Place seemed somewhat tepid. With one million square feet in gross floor area coming on line in late 2018, One Taikoo Place will drive the company's earnings in 2019, but it may not get the same degree of rental uplift as Pacific Place. We maintain our narrow moat rating and our fair value estimate of HKD 30.

On the Hong Kong retail side, retail sales were up 22% and 9%, respectively, at the tourist-driven Pacific Place and Citygate Outlets, but the increases were relative to the trough seen during the first quarter of 2017. Given the lease expiry profile of 33% in 2018, the Hong Kong retail portfolio is likely to see positive, but weak rental reversions relative to the peak rental rates of 2015.

For the city as a whole, for the first five months of the year, retail sales were up 14% year on year, continuing the recovery started March 2017. Also, tourist arrivals during the same period were up 10% year on year, with mainland tourists up 13%. The company's Hong Kong retail portfolio will likely continue to see stronger sales growth relative to the city's average, given their tourist-driven focus. For the company's 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.

Outside Hong Kong, retail assets in China saw continued growth. Mature properties Taikoo Li Sanlitun and Taikoo Hui Guangzhou logged retail sales gains of 10% and 12%, respectively, while the newer Taikoo Li Chengdu saw retail sales up near 30% year on year, but sales growth slowed to 6% at Indigo. On the property trading side, the company has few projects in the pipeline at this point except for a small redevelopment project. Further, the company put its serviced apartment project Taikoo Place Apartments up for sale, further minimizing its exposure to the elevated Hong Kong residential property sector.