Swire Properties Q1 Retail Strong, Hong Kong Office Shows Signs of Bottoming Out

Overview

JPMorgan released an assessment of Swire Properties' Q1 2026 operating data. The report notes that while the Hong Kong office market remains depressed, retail operations in Mainland China and Hong Kong performed strongly, with tenant sales growing significantly. The institution believes that the current stock price primarily reflects improvements in Mainland retail, while the potential recovery of the Hong Kong office business, accounting for 30% of Net Asset Value, remains undervalued. With primary street rents in Central stabilizing, the institution expects the negative rent reversal gap to narrow in the second half of the year, driving further stock revaluation. Maintain "Overweight" rating, target price HKD 30.

Core views

Mainland retail business demonstrated comprehensive strong growth momentum. All Mainland malls reported positive year-on-year sales growth. Among them, Shanghai Tai Koo Hui saw sales surge 82% YoY due to the opening of the Louis Vuitton cruise concept store; Beijing Sanlitun Taikoo Li saw sales grow 56% YoY due to the opening of luxury flagship stores in the north district. Even excluding these two outstanding projects, the overall retail sales growth of remaining malls accelerated from the estimated 9% in Q4 2025 to 13% in Q1 2026. Chengdu Taikoo Li and Guangzhou Tai Koo Hui also achieved double-digit growth of 18% due to main store reopenings or completed adjustments. Hong Kong retail business also accelerated its return. Tenant sales YoY growth rate rose from the estimated 6% in Q4 2025 to 13%. The three major shopping centers maintained full occupancy. Discovery Bay Premium Outlets performed best, growing 22% YoY (partially affected by low base last year); Taikoo Shing Centre grew 14% YoY, benefiting from the recovery of discretionary consumption retail and passenger overflow effect brought by renovation at Landmark North. Hong Kong office business was still at bottom level but showed signs of stabilization. Negative rent reversal rates for Taikoo Shing Centre and Taikoo Place remained at 14%, flat compared to 2025 levels, with no changes in asking rents or occupancy. However, leasing activity increased. Taikoo Shing Centre and Taikoo Place completed 4 and 6 new leasing transactions respectively, covering finance, legal, technology, and retail industries. Given that primary street rents in Central have started to stabilize, the institution expects the negative rent reversal amplitude at Taikoo Shing Centre to narrow in the second half of 2026. On valuation and investment logic, the institution favors Swire Properties' scarcity, especially the certainty of its commitment to single-digit annual dividend per share (DPS) growth. At the same time, continuous improvement in Mainland retail and potential recovery in Hong Kong offices will drive earnings growth, with expected CAGR of earnings from 2025-2028 fiscal years at 14%. Good capital recycling record is also one of its core advantages.

Analysis framework

The institution uses a valuation method combining Sum-of-the-Parts (SOTP) and Net Asset Value (NAV) discount. First, divide company business into Mainland Retail, Hong Kong Retail, Hong Kong Office, Residential Development, etc., evaluate asset value and cash flow contribution separately. Focus on operational data of each segment, such as tenant sales YoY growth rate, rent reversal rate, occupancy rate, etc., to judge fundamental trends. Second, determine reasonable NAV discount multiplier by comparing historical average discount rates. The report particularly emphasized "expectation gap" analysis, pointing out that the market has priced in Mainland retail positive news, but did not sufficiently reflect marginal improvement in Hong Kong offices, thus concluding there is further space for stock price revaluation.

Methodology notes

• Valuation MethodNAV Net Asset Value Method

  Valuation based on Net Asset Value (NAV) discount

  For real estate companies with large investment properties, institutions typically calculate market value of all assets minus liabilities to get NAV, then give certain discount or premium according to market sentiment and company characteristics to determine target price. This report uses 35% NAV discount as valuation benchmark.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  Analyze retail and office business through tenant sales and rent reversal rate

  In commercial real estate analysis, retail looks at "volume" (sales/crossing traffic), office looks at "price" (rent/reversal rate). The report judges retail prosperity by breaking down tenant sales growth, and judging supply-demand balance point of office market by rent reversal rate.

• Event Gaming and Behavioral FinanceExpectation Gap/Expectation Management

  Identify potential Hong Kong office recovery potential unpriced by market

  Institutions found through analysis that stock price increase was mainly driven by Mainland retail, and negative news from Hong Kong office business had fully emerged and showing signs of stabilization, this positive change not yet fully priced by market constitutes potential expectation gap and investment opportunity.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Swire Properties (1972.HK)

  Direct beneficiary target, retail business strong and office business expected to bottom out and rise

  Strengths

  High dividend growth certainty, excellent Mainland retail performance, strong capital recycling ability

  Weaknesses

  Hong Kong office business still faces pressure of negative rent reversal

  Comparison

  Compared to pure residential developers, its holding properties provide stable cash flow; compared to pure retail REITs, its office business provides additional elasticity

  Risks

  Hong Kong office market deterioration exceeds expectations, retail recovery falls short of expectations

Key data

• Shanghai Tai Koo Hui Tenant Sales YoY Growth Rate+82%Driven by Louis Vuitton concept store opening
• Beijing Sanlitun Taikoo Li Tenant Sales YoY Growth Rate+56%Driven by luxury flagship store opening
• Mainland Other Malls Retail Sales Growth Rate13%Accelerated from estimated 9% in Q4 2025
• Hong Kong Retail Tenant Sales YoY Growth Rate+13%Accelerated from estimated 6% in Q4 2025
• Hong Kong Office Negative Rent Reversal Rate-14%Taikoo Shing Centre and Taikoo Place, expected to narrow in H2
• 2025-2028E Earnings CAGR14%Institution forecast
• Target Price Implied NAV Discount35%Higher than long-term historical average by 1 std dev

Impact & implications

The report believes that Swire Properties, as a beneficiary of both high dividend certainty and earnings recovery, possesses allocation value. Strong performance of Mainland retail provides the company with a stable cash flow base, while any marginal improvement in Hong Kong office market will bring significant valuation elasticity. For investors, focus should shift from simple Mainland retail growth to signs of stabilization in Hong Kong office leasing market, which may become a catalyst for further stock price rise.

Risks

• Hong Kong office market deterioration exceeds expectations
• Hong Kong or Mainland retail recovery worse than expected
• Unexpected dividend cut

What to watch

• Stabilization of Hong Kong office prime street rents and narrowing of negative rent reversal rate
• Continued sales boost from new flagship stores in Mainland
• Progress of company capital recycling projects