Swire Properties: Office Segment Under Pressure, Support From Retail Segment

The underlying trends within Swire Properties’ 01972 first-quarter operational update are within expectations, with office demand in the first quarter still weak, while retail was firmer. However, the 11% and 9% negative rental reversion for its flagship assets in Pacific Place and Taikoo Place, respectively, disappointed as leases continue to be renewed at a lower market rate compared with the previous cycle. That said, with headline rents remaining stable from the previous quarter, we retain our fair value estimate of HKD 31 per share after fine-tuning our assumptions to reflect the weaker-than-expected office rental reversion over the near term. We think that shares remain undervalued, with a 33% discount to our fair value estimate as of May 5 close price. We continue to see retail recovery in both Hong Kong and mainland China as a near-term catalyst for Swire Properties, and expect the office recovery and the completion of Six Pacific Place to drive the company’s performance from 2024.

Tenant sales of Swire Properties’ three retail assets in Hong Kong rebounded significantly by 20% to 96% against the low base during the fifth wave of pandemic last year. Occupancy was also high at above 95% across portfolio. The trend is similar in Swire’s mainland retail portfolio, in which the properties also showed healthy year on year pick-up in tenant sales and stable occupancy of above 90%. This is in line with our expectation that retail properties are to recover ahead of office properties. We expect stronger growth in retail properties’ rental as tourism resumes after border reopening, and we do not expect any rental concessions to be granted from 2023.