As a result, we lower our Central Grade-A office rent decline forecast from a 10- 15% decline to a 20-25% decline as our base case is for the COVID-19 outbreak in Hong Kong to be contained by the summer. Our latest forecast is largely in line with the SARS outbreak in 2003, which had a 22% YoY decline and a 27% drop from the peak to the trough. At present, we still do not expect Central’s rent to fall as much as they did during the GFC in 2008 (a 34% YoY decline and a 43% drop from the peak to the trough) and Asian financial crisis in 1998 (a 48% YoY decline and a 57% drop from the peak to the trough).
This is because we think the overall new office supply in Hong Kong remains limited in 2020-21E and major supply in Hong Kong Island will unlikely be available until 2022E. Considering the developments of the previous two downcycles, we also expect Central Grade-A office vacancies to further edge up, surpassing 8% by the end of 2020, a roughly 4ppt increase from the current 4.2%. At the same time, based on the current leasing expiry schedule and assuming no more new lease absorption in 2020E, we think vacancies could exceed 10%, according to our conversation with Colliers.
Given Hysan’s and Swire’s low gearing and strong cash positions, we believe these two companies will still be able to maintain their steady DPS policies despite the potentially challenging business environment ahead. For HKL, we believe the company will still be able to deliver a steady DPS in 2020E. This is despite its recent land acquisitions of the Shanghai West Bund commercial project, valued at Rmb31,050bn, given that we think the potential risk of refinancing is low after the recent liquidity easing in China. For Champion REIT, we expect its dividend per unit to fall in line with earnings in 2020, since the company has a dividend payout policy of 95%.