UOB Kay Hian has maintained its “buy” call on Mapletree Pan Asia Commercial Trust (MPACT) N2IU with a reduced target price of $1.90 from $2.02 previously, as its Japan portfolio weathers pressure from new supply.
In his report dated July 24, analyst Jonathan Koh says that vacancy rates in the Central 5 Wards, or Central Tokyo, eased 0.1 percentage points q-o-q to 4.1% in the first quarter of 2023, while Grade A rents eased slightly by 0.4% q-o-q to ¥22,550 ($211.80) per tsubo (3.31 sqm) in the same period.
Koh believes there is a “flight to quality” with companies moving to higher grade and better located office buildings. He notes that several large-scale projects in Central 5 Wards will be completed in 2023, with landlords expected to reduce rents to attract tenants.
According to CBRE, vacancy rates are expected to increase as Grade A rents drop 2.7% over the next 12 months.
The analyst says that MPACT’s cost of debt is expected to increase from its weighted average all-in cost of debt of 2.68% in FY2023 as interest rates remain elevated and older fixed rate debt and interest rate swaps progressively mature. Currently, the REIT’s aggregate leverage is 40.9%, with 75.5% of its borrowings fixed or hedged to fixed interest rates.
Coupled with the depreciation of the Chinese yuan, which has depreciated 10.1% y-o-y against the Singapore dollar, Koh has trimmed his FY2024 ending March 2024 dividend per unit (DPU) forecast for MPACT by 9%. He has also factored in an increase in cost of debt to 3.2% in FY2024.
See also: Test debug host entity
While the analyst has reduced his target price to $1.90 accordingly, he is maintaining his “buy” call on MPACT as the REIT continues to benefit from resilient growth from VivoCity and Mapletree Business City (MBC) in Singapore and recovery from Festival Walk in Hong Kong.
As tourists return to Sentosa and VivoCity, MPACT has completed an 80,000 sqft reconfiguration to convert part of department store Tangs’ Level 1 space into a new retail zone with new food and beverage options and an enhanced beauty and fragrance cluster. The new retail zone has progressively reopened since May 2023 and generated a return on investment (ROI) of 20%.
Resorts World Sentosa (RWS) has also embarked on a $4.5 billion expansion, including adding Minion Land to Universal Studios Singapore, expanding SEA Aquarium by three times in its rebranding as Singapore Oceanarium, and refurbishing three hotels. VivoCity benefits from the return of tourists as it serves as the gateway to Sentosa, which includes RWS, with 98% of all tourists visiting the island, says Koh.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
Meanwhile, MBC has maintained its position as a steady and resilient contributor. MBC clocked positive rental reversion of 8.0% with a healthy retention of 62.9% in FY2023, renewing the majority of leases with Google Asia Pacific — its largest tenant that contributed 5.9% of total gross rental income as of March — in FY2022 and FY2023. Occupancy at MBC also remained stable at 95.4% as of March.
According to CBRE, average city fringe rents were flat q-o-q at $6.10 per sqft per month and vacancy rates remained low at 5.2% in 2Q2023. Koh notes that there will be no new supply of business park space in the city fringe area in 2024 and 2025, and that MBC also benefits from the government’s efforts to promote high-value manufacturing and knowledge industries.
In Hong Kong, Festival Walk’s recovery from the reopening of borders is underway. Hong Kong has progressively eased Covid-related restrictions in 2HFY2023, with quarantine-free cross-border travel between Hong Kong and Mainland China resuming in January.
Visitor arrivals to Hong Kong hit 2.8 million in May, representing 48% of pre-pandemic levels. Tourists from Mainland China, which accounted for 30% of pre-pandemic retail sales, accounted for 79% of visitor arrivals in the first five months of 2023.
Koh says that retailers also benefit from two instalments of consumption vouchers disbursed to residents totalling HK$5,000 ($849.98) in April and July. Retail sales recovered 18.4% y-o-y in May, while restaurant receipts rebounded 81.8% y-o-y in 1Q2023.
The analyst notes that leasing demand is driven by tourist-oriented trades, such as food and beverage, pharmacies, cosmetics and beauty, and watches and jewellery. CBRE expects Hong Kong retail rents to recover 5% to 10% in 2023.
Aside from Hong Kong’s tourism recovery and the resilient growth of VivoCity and MBC, MPACT also has four properties located in the HarbourFront area, which accounted for 49% of its portfolio valuation, and could also be share price catalysts. Koh says that these properties will benefit from the development of the Greater Southern Waterfront and the rejuvenation of Sentosa and Pulau Brani.
As at 3.07pm, units in MPACT were trading 1 cent or 0.61% up at $1.66.
