Demand for office space raises growth outlook
Increased demand for office space and the trend for businesses to relocate to Hong Kong's up-and-coming areas will help Prosperity Real Estate Investment Trust (Prosperity Reit) build on the solid financial foundations it has established in recent years.
The company posted strong interim results for the first half of 2011, signalling continued attractive distribution yields for shareholders and likely growth in the value of underlying assets.
Drawing attention in particular to a year-on-year reduction of 35.9 per cent in total finance costs, Mavis Wong Lai-hung, acting CEO of ARA Asset Management (Prosperity), which acts as manager of Prosperity Reit, attributes this to prudent financial management policies.
Cost savings, together with stable rental revenue from the present portfolio of seven high-quality commercial properties in Hong Kong, led to a 7.2 per cent year-on-year increase in distribution per unit (DPU) for the six months to the end of June, Wong points out.
She says in light of this good performance, the reit's unit holders will receive an interim DPU of 0.598 HK cents, representing an annualised distribution yield of 6.5 per cent.
Prosperity has also taken steps to secure the financial position against any medium-term fluctuation in interest rates.
This has been done with the successful refinancing of a five-year term loan of HK$1.77 billion with maturity in August, 2015.
The subsequent 'plain vanilla' interest rate swap agreement, entered into in December last year, hedges 80 per cent of the term loan at a lower rate of 2.145 per cent. This contributed to immediate interest savings registered in the first half of the year.
With a local property portfolio comprising all or part of three grade A office buildings, three industrial/office buildings and one industrial building, the total gross rental area is about 1.22 million sqft. Continuous strong demand for office space in the first half of the year saw the appraised value of Prosperity Reit's property increase by 11.9 per cent to HK$6.64 billion by the end of June.
The portfolio also recorded a strong rental reversion rate of 12.3 per cent and revenue of HK$134.7 million during the reporting period. 'Demand for office space was at its strongest level since the 2008 financial crisis.
'Additionally, the shortage of office space in core business districts has resulted in escalating rents and led to an intensified trend of office relocation to decentralised areas,' Wong says.
The occupancy rate of the portfolio reached an optimal level of 98.5 per cent in late June, giving an average effective unit rent of HK$14.77 per square foot. Because of this, two important measures, the cost-to-revenue ratio and the gearing ratio, remained sound at 22.4 per cent and 29.8 per cent respectively.
Rental and car park income was HK$1.2 million or 1.1 per cent higher than in the corresponding period last year. Taken together, income from these items amounted to HK$113.8 million with the additional HK$20.9 million making up the total income for the period coming from other rental-related income.
If seen as a separate item, the net property income of HK$104.6 million for the first half of this year was HK$1.2 million or 1.1 per cent behind the figure reported for the corresponding period last year. Looking forward, Wong says. Prosperity Reit will continue to benefit from the stable growth of the Hong Kong economy.