Swire’s Hong Kong Office Bldgs See Negative Rental Reversions
HONG KONG – The office assets of Swire Properties in the Chinese territory continue to be under pressure amidst the challenging state of the local office market, reported ratings agency Morningstar on Tuesday (7 November, SGT).
As a matter of fact, office rental reversion at Taikoo Place and Pacific Place reached -8 percent and -13 percent, as office leases at both properties continue to be renewed at lower market rents versus the previous lease cycle, according to Swire’s business update for the third quarter of the year.
Moreover, Morningstar revealed that the overall occupancy level of Swire’s Hong Kong office portfolio slid to 89 percent at the end of Q3 2023 from 90 percent during the second quarter. This was due to a dip in the office occupancy in Taikoo Place, while occupancy in Pacific Place remained healthy at 97 percent.
“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,” noted the ratings agency.
“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 percent as of the end of September, according to JLL data, and it would likely take time for the excess office supply to be absorbed.”
Still, the ratings agency said Swire’s Q3 2023 performance was in-line with its expectations. However, Hong Kong’s sluggish office sector and high interest rate environment have negatively affected the company’s share price.
Also, Swire’s shares as of the 3 November close price are attractive as they were trading at a 50 percent discount to its fair value estimate as per Morningstar.
“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 neighbourhood. 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,” added the ratings agency.