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Office 'recentralisation' in Hong Kong to benefit landlords like Hongkong Land Holdings: CGS-CIMB

Felicia Tan
Felicia Tan • 2 min read
Office 'recentralisation' in Hong Kong to benefit landlords like Hongkong Land Holdings: CGS-CIMB
The team has identified strong rental growth in Hongkong Land’s IP portfolio as a potential re-rating catalyst.
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CGS-CIMB Research analysts Raymond Cheng, Will Chu and Steven Mak have kept “add” on Hongkong Land Holdings with a higher target price of US$6.30 ($8.49) from US$5.70 before.

The higher target price comes as the team lifts its net asset value (NAV) to US$10.50 from US$10.30. It has also narrowed its target discount to NAV to 40% from 45% before.

In addition, the team has lifted its earnings per share (EPS) estimates for the FY2021 to FY2023 by 0.2% to 1.4% to factor in the group’s smaller number of shares outstanding after the share buybacks.

Hongkong Land’s share price grew some 30% since Sept 6, when it announced to reduce its share capital through a US$500 million share repurchase programme.

As at Nov 1, the group has repurchased 17.9 million shares for US$90 million, which is 18% of its total budget.

See: Hongkong Land's share buyback reflects management's positive response to investors' concerns: CGS-CIMB

See also: Brokers' Digest: Prime US REIT, Hongkong Land, Yangzijiang Shipbuilding, SIA, CICT, ST Engineering, OUE REIT, Wilmar

The analysts have estimated that the group may use up its buyback budget by 2QFY2022 or 3QFY2022.

As at its report on Nov 2, Central office rents have returned to pre-financial crisis levels of 2007.

As such, the team thinks the level is “attractive enough for corporations” that left Central to return, leading to office “recentralisation”.

See also: Analysts weigh in on Singtel after restructuring of Intouch Holdings

“This new trend should benefit large office landlords in Central, such as Hongkong Land, in our view,” writes the team.

As at end 1HFY2021, Hongkong Land’s Central office vacancy was 6.4%, below 7.4% for overall Central offices.

Though negative rental reversions may continue in the 2HFY2021, lower rents make its portfolio competitive for retention or acquisition of key tenants.

“We believe its vacancy reached a short-term peak at end-1HFY2021 and will moderate in 4QFY2021 and 1HFY2022, as the Hong Kong special administrative region (SAR) government is planning to reopen borders with mainland China as local Covid-19 cases have subsided,” the team adds.

For more stories about where the money flows, click here for our Capital section

To this end, the team has identified strong rental growth in Hongkong Land’s investment property (IP) portfolio as a potential re-rating catalyst, while prolonged border closures in Hong Kong and Singapore are key downside risks.

Shares in Hongkong Land closed at US$5.70 on Nov 9.

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