Fitch Ratings has affirmed Hong Kong-based Swire Properties Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A'.
The Outlook is Stable. Fitch has also affirmed Swire Properties' senior unsecured rating at 'A', and the ratings on the medium-term note programme and issues from Swire Properties MTN Financing Limited at 'A'.
The affirmation reflects our expectation that Swire Properties' investment-property (IP) EBITDA interest coverage will remain well above 4.0x, despite rising debt as a result of capital investments and an increase in funding costs. The ratings are also supported by stable rental income from a high-quality IP portfolio in prime locations across Hong Kong and key cities in mainland China.
Key Rating Drivers
Higher Funding Costs; Healthy Coverage: We expect Swire Properties' funding cost to rise over the next two years as maturing debt is refinanced at higher interest rates, but we expect the increase to be gradual as it mainly uses fixed-rate debt and has a well-spread-out maturity profile. Our rating case assumes its funding cost will average 3.6% in 2023, from 3.0% in 2021. We forecast the higher cost and rising debt on capital investments will lead to a drop in EBITDA interest coverage to 9.7x by 2023 (2021: 11.2x), above our negative rating trigger of 4.0x.
Leverage to Rise: We expect higher leverage as Swire Properties plans to spend over HKD100 billion to invest in mainland China, Hong Kong and south-east Asia, including property trading projects, over the next 10 years. There is ample headroom as leverage is low, with net debt/IP value of 5.5% in 1H22, after non-core asset disposals in the last few years. Investment outflows that are larger than we expect could pressure parent Swire Pacific Limited's (A-/Stable) consolidated profile, affecting Swire Properties' ratings.
Resilient Office Portfolio: We expect Swire Properties' office rental income to remain resilient, even as Hong Kong office market demand remains soft due to travel restrictions. We forecast a low-single-digit decline in rental income from the Hong Kong office portfolio in 2022 (-1% in 1H22) as occupancy remains high (96% as of 1H22) and the impact of widening negative rental reversion, especially at One and Two Pacific Place, is tempered by a well-spread-out lease expiry profile, with only 3.7% of leases expiring in 2H22 and 17.8% in 2023.
We forecast Hong Kong office rental income to grow by 7% in 2023 on the contribution from newly completed Two Taikoo Place. We also expect the negative rental reversion to ease in 2023 as expiring leases carry lower rents after rents began falling in 2020. We expect rental income from mainland China offices to remain stable, with high occupancy (94%-100%) and moderately positive rental reversion. We expect better reversion for Shanghai and Beijing, where supply is limited in core areas; 4.4% of leases will expire in 2H22 and 37.4% in 2023.
Lockdowns Affect China Retail: Retail sales fell across its Chinese malls in 1H22 amid Covid-19-related travel restrictions, including a 53% drop at HKRI Taikoo Hui in Shanghai and 25%-26% in Taikoo Li Sanlitun and INDIGO in Beijing. Occupancy stayed high at 96%-100% in 1H22. We believe retail sales will recover in 2H22 in the absence of large-scale lockdowns, but growth may be modest given the economic slowdown. We expect the Chinese retail portfolio's rental income to rise by 9% in 2022 (9% in 1H22) as Sanlitun West and Taikoo Li Qiantan start contributing.
Stabilising Hong Kong Retail: Retail sales in its Hong Kong malls fell by 2%-5% in 1H22, narrowing from the 9%-21% drop in 1Q22 amid the fifth wave of the pandemic. Occupancy stayed high at 96%-100% in 1H22. The company offered rental concessions to tenants that had to close due to the government's pandemic measures, but they were less than those offered in 2021. We expect retail sales to stabilise, but rental reversion to remain negative. We forecast its Hong Kong retail rental income will fall by 5% in 2022 (-10% in 1H22, or -2% on a cash concession basis).
Rated Higher than Parent: Based on our Parent and Subsidiary Linkage Rating Criteria, Swire Properties' rating is capped at one notch above the consolidated credit profile of Swire Pacific, which is at the same level as Swire Properties' standalone credit profile.
This reflects our assessment of 'Open' legal ring-fencing as there is no covenanted ring-fencing mechanism in place to limit the parent's access to Swire Properties' cash flows. It also considers the parent's 'Porous' access to and control of Swire Properties' cash and other assets due to the subsidiary's separate public listing, which provides some limitations on cash upstreaming to the parent, as well as its entirely external non-equity funding and independent cash and funding policies.
Derivation Summary
Swire Properties is well-positioned among Hong Kong landlord peers that are rated in the 'A' category. Its IP portfolio primarily consists of Grade A offices and shopping malls in prime locations in Hong Kong and key cities in China with high occupancy rates. Its IP value of around USD34 billion and IP EBITDA of around USD1.0 billion are lower than Sun Hung Kai Properties Limited's (A/Stable) USD50 billion IP value and USD2.0 billion IP EBITDA, but are similar to that of Link Real Estate Investment Trust (A/Stable).
Swire Properties' IP EBITDA interest coverage of around 11.7x and net debt/IP value of 5.5% in 1H22 were better than those of its 'A' rated peers.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
attributable rental income to increase by 1% in 2022 and 4% in 2023 (flat in 1H22)
IP EBITDA margin to remain stable at 67%-68%
HKD10 billion in property capex per annum, including investments in property trading
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch does not envisage positive rating action within the next 12-18 months due to its large capital investment plan.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Deterioration in Swire Pacific's consolidated credit profile to below 'A-'
Swire Properties' IP EBITDA/gross interest expense falls below 4.0x for a sustained period
Swire Properties' net debt/IP value above 30% for a sustained period
Heightened execution and financial risk due to larger-than-expected investments
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Ample Liquidity: Swire Properties had HKD5.9 billion in cash and HKD6.5 billion in committed undrawn facilities as of 1H22, sufficient to cover HKD2.8 billion in short-term debt. Swire Properties faces minimal capital-market debt repayment in the next 18 months, with only HKD200 million in bonds maturing in 2023.
Issuer Profile
Swire Properties is one of Hong Kong's leading property companies, with IP and development-property businesses mainly in Hong Kong and mainland China. The company, which is listed on the Stock Exchange of Hong Kong, is 82%-owned by Swire Pacific.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONS
Entity / Debt
Rating
Prior
Swire Properties Limited
LT IDR
A
Affirmed
A
senior unsecured
LT
A
Affirmed
A
Swire Properties MTN Financing Limited
senior unsecured
LT
A
Affirmed
A
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VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.
SWIRE PROPERTIES LIMITED 
