Swire Properties: Third-Quarter Operating Update Is Within Expectations

We maintain our fair value estimate of HKD 31 for narrow-moat Swire Properties 01972 following the company’s in-line third-quarter operating update. While the weak office market in Hong Kong and the high interest-rate environment have weighed on the share price’s performance, we think shares are attractive with a 50% discount to our fair value estimate, as of the Nov. 3 close price, for investors willing to look past the current downturn. Our long-term view is unchanged and we continue to expect the Swire Properties’ flagship assets to benefit from the company’s development master plan, which gradually improves the overall attractiveness of the neighborhood. In the near term, we anticipate further tourism recovery to support the retail segment in the fourth quarter, partly offsetting the weakness in the office assets.

The Hong Kong office assets continue to be under pressure given the challenging office market in Hong Kong. Rental reversion at Pacific Place and Taikoo Place offices were at negative 13% and negative 8%, respectively, as leases continue to be renewed at lower market rent compared with the previous lease cycle. Overall occupancy for the Hong Kong office portfolio edged down to 89% as of the end of September from 90% as of the end of June, led by a slight decline in Taikoo Place office occupancy, while Pacific Place office occupancy remained stable at 97%. We believe the relative outperformance of Pacific Place offices reflects the flight to quality trend, where high-quality office buildings in the Greater Central area remain the preferred location for corporates, especially as market rents are now more affordable. That said, we continue to expect weak leasing momentum for Two Taikoo Place (completed in September 2022) and Six Pacific Place (scheduled for completion by the end of 2023), as the city-wide vacancy rate is elevated at 12.7% as of the end of September, according to JLL data, and it would likely take time for the excess supply to be absorbed.