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May 30 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Hong Kong-based Swire Properties Limited's (Swire Properties) Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A' with Stable Outlook. Fitch has also affirmed Swire Properties' foreign-currency senior unsecured rating, and the ratings on its medium-term note programme and issues from Swire Properties MTN Financing Limited at 'A'.
The affirmation reflects the delivery of strong and stable rental income from Swire Properties' mature investment properties portfolio, which provides strong gross rental income coverage ratios. The company continued to remain prudent on expansion in China and demonstrated strong execution in its project in Miami, USA. Its financial position remains prudent with good liquidity.
KEY RATING DRIVERS
Mature Stable Hong Kong Rentals: The gross rental income from the company's investment properties in Hong Kong has posted 2.9% CAGR since 2009. It reached HKD8bn in 2013 and has been consistently above HKD7bn in the past five years. This supports a strong and stable total gross rental income coverage ratio of 5.1-6.2x. Swire Properties has a well-established Grade A office portfolio in both the central business district and non-central areas (such as East Hong Kong) in Hong Kong. The diversity of the office portfolio mitigates the risk of weakening rents due to the sluggish environment for the financial industry.
Commitments to Redevelopment Projects: Swire Properties continues to expand its Hong Kong investment property portfolio via acquiring or redeveloping old buildings situated near its current properties. For example, the company has previously expanded Pacific Place Three via redevelopment of several nearby sites and it is currently redeveloping the TaiKoo Place techno-centres to Grade A office space, and turning an industrial site in the southern part of Hong Kong island to office space. Redevelopment sites carry lower execution risks and allow Swire Properties to tap resilient demand for office and other commercial space in existing well-developed areas. This will gradually strengthen Swire's leasing income in the long term.
Prudent Expansion in China: Swire Properties has been very prudent in expanding in Hong Kong and China. In China, it only invests in first-tier cities (for example, Guangzhou, Beijing and Shanghai) or second-tier cities with very strong potential (for example, Chengdu and Dalian). Swire also prefers to partner domestic property developers in Chinese projects. For example, Swire Properties partnered Gaw Capital Partners for their , TaiKoo Li Sanlitun Village in Beijing, China. Since then, Swire Properties has completed two more leasing projects in China - Taikoo Hui in Guangzhou with Guangzhou Daily and INDIGO in Beijing with Sino-Ocean.
Expansion in US: Swire Properties aims to deliver high-quality products and smooth out capex in its development in Miami of Brickell City Centre (BCC), a project that includes office, residential and hotel components. Phase 1, with expected attributable GFA of 2.72 million sq ft is targeted to open in 2015 while Phase 2, with 1.3 million sq ft of GFA, is due to open in 2019.
Less Reliance on Parent's Funding: Swire Properties will continue to refinance its existing intercompany loans from Swire Pacific Limited with external funding sources. Borrowings from Swire Pacific have reduced from 74% in end-2011 to 39% in end-2013. We expect this ratio to drop further in 2015-16. This is neutral for Swire Properties' credit rating because Fitch expects Swire Properties' stable rental income streams will support its current credit profile.
Housing Policy Slows Sales: Swire's residential property business is focused on the luxury segment. In 2013, the Hong Kong government introduced measures to cool the housing market, which have hit the luxury residential sector the hardest. Luxury home purchasers in Hong Kong are usually experienced buyers (that is, not first-home buyers), buyers from mainland China or corporate purchasers. All these buyers will be affected by either the double-stamp duty or buyer's stamp duty, or both. Also, the introduction of the buyer's stamp duty may make it more costly to redevelop old residential buildings.
Adequate Interest Coverage: Fitch expects Swire Properties' recurring interest coverage (investment property EBITDA/gross interest expense) to stay above 4.5x in the next few years, due to additional leasing income from newly completed properties.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Investment property EBITDA/gross interest expense falling below 4.0x on a sustained basis
- There is an aggressive expansion in China with heightened execution and financial risk
- Material weakening of Swire Pacific's non-property business, which may require Swire Properties to increase its support to the group
Fitch does not envisage any positive rating action within the next 12-18 months, until Swire Properties' China investment portfolio reaches a critical mass, and enables the company to have meaningful geographical diversification for its leasing income.