HongKong Land stock plummets by 15%

Weak Central rents are to blame.

According to Kim Eng's Hong Kong Daily Research, the HongKong Land stock fell 15.6% YoY in 2013, partly due to weak Central rents and concerns about negative rental reversions this year.

This is due to higher base of rents that will expire or be subject to rental revisions this year at HKD108/sq ft/month for its offices.

Here's more from Kim Eng:

In 1Q14, rents signed for its office portfolio are not yet in negative territory and we believe the gap between Central and decentralized office sub-markets has narrowed to the point where several years of decentralization is coming to an end.

Lack of supply is certain, so the variable is demand strength. If the cross-border Shanghai-HK stock market pilot programme is successful, there is potential upside for office demand from domestic Chinese financial institutions.

Following HK Land’s announcement of leasing floor space to UOB, competitor CREIT’s Citibank Plaza (~14% vacancy) also leased space to Kontiki Capital, Donglin, EFMI and Hammer Capital, highlighting the renewed interest in Central.

Recently, China Merchants Securities and China Securities Co. (part of CITIC) were reported to take up ~13k sq ft each at the counter’s Two Exchange Square at HKD120-130/sq ft (which looks like face rents to us), which could help bring down HKL’s Two Exchange Square vacancy to an estimated ~5%.