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Morningstar | Swire Properties Slow and Steady, Patience and Transformation

Swire Properties' 40-year history in Hong Kong has been characterised by patience and transformation. The company's modus operandi is acquiring assets in less-than-prime areas. Over a span of several decades, the company gradually builds, manages, upgrades, expands, and eventually transforms the entire areas.As Hong Kong's largest office landlord, Swire Properties benefits from the office decentralisation trend. Spurred on by high occupancy costs in Central (the traditional central business district, or CBD), the success of the International Commerce Center in Kowloon, and the government’s Kowloon East mandate, companies are increasingly looking beyond Central. The achieved office rent in Pacific Place is now on par with those in the CBD, whereas there was a gap of HKD 40 per square feet when the asset first came into the market. Island East, representing a largest concentration of single-landlord office spaces, is increasingly an attractive option for nonfinancial firms, given the ease of access to Central.Fundamentally, the supply of office space in Hong Kong is below the level that a world financial centre typically demands, and such spaces are disproportionately located in the CBD. We believe the decentralisation trend is structural, and the company’s flagship assets will fare well in the coming years. Their performance will dictate the company’s overall return.The path in mainland China is more nuanced. The company entered China relatively late, making its first major acquisition in 2001. Given the different competitive environment and the company’s short track record, it is difficult to assess if and when a similar transformation can take place. While the potential upside may be more limited for projects in China, the company is prudent in managing the risks. All undertakings in China are joint ventures with local partners. Furthermore, with the exception of the recently signed Dalian project, the company’s projects in China do not contain a residential trading component. Projects are funded through project and company debts without reliance on local property trading proceeds, hence bypassing the volatile Chinese residential housing market.