Pacific Place showed positive trends, including full officeoccupancy, higher office spot rents, slower retail sales decline
Steady trends from the Hong Kong office portfolio anchor SPL’soperations amid macro uncertainties
TP unchanged at HKD34, based a 26% discount to NAV
HK office trends resilient, but retail sales growth and residential sales slowed.
Swire Properties (SPL) released 4Q15 quarterly update on 29 January 2016, whichshowed positive trends at Pacific Place (PP), albeit moderate, including full officeoccupancy, higher spot rents at PP 1-2 and slowing retail sales decline. Outside PP,office trends in HK were steady while retail sales growth at malls in HK and China aswell as residential sales slowed in 4Q15. With 50% of gross asset value contributedby HK office assets, we expect SPL to benefit from the relatively resilient trends weexpect in the HK office market amid macro uncertainties.
HK office trends still positive. As of 4Q15, PP achieved full occupancy (+1pp q-o-q)and spot rent at PP 1-2 of HKD110-125psf (up HKD5psf q-o-q for the third consecutivequarter). Cityplaza office occupancy also gained 1pp q-o-q to 100%. Other HK officetrends were steady q-o-q, including spot rents at PP 3 (HKD90-100psf) and IslandEast portfolio (HKD mid 40s to high 60s) as well as HK overall office occupancy(99%). China office trends also held up q-o-q except for ONE INDIGO in Beijing,where occupancy fell for the fourth straight quarter, -2pp q-o-q to 92%.
Retail sales trends improved at PP but softened at other malls. PP retail salesdecline narrowed to -11.8% y-o-y in 2015 (vs -13.7% in 9M15) helped by the lowbase from 4Q14 which we highlighted our 9M15 update. Retail sales growth howeverslowed in other malls, especially at Cityplaza (+0.7% in 2015 from +6.7% in 9M15),compared to the 20%-owned Citygate Outlets (-10% in 2015 from -7.9% in 9M15)and malls in Beijing, Guangzhou and Chengdu where retail sales were up 3.3-30.3%y-o-y in 2015 (vs 4.4-33.6% in 9M15). As of 4Q15, retail occupancy remained high at100% in both HK (flat q-o-q) and 88-99% in China (vs 86-99% as of 3Q15).
A slow quarter for residential sales. Most of the residential sales recorded sinceNovember 2015 were from REACH and RISE in Miami, with 5 and 10 units sold,respectively, bringing accumulated sales to 86% and 39% of total. Handover of theMiami residential units is scheduled for 2016, together with the completion of Phase Iof Brickell City Centre project.
We have a Buy rating and target price of HKD34. Our fair value target price isbased on a 26% discount to our NAV estimate of HKD46. SPL stock trades at 56%NAV discount. Key downside risks to our view include lower-than-expected rentalachieved or higher cap rates driven by rising US long-term bond yield.