Swire Pacific, preparing for a US$3 billion Hong Kong initial public offering of its real estate division, has admitted the unit's headline profits will slump as last year's blistering growth in commercial property rents peters out.
The company said in a stock exchange filing that its property business, which owns Hong Kong landmarks including Pacific Place and Festival Walk, would make a net profit of HK$7.14 billion in the year to December 2010, down from HK$15.39 billion last year.
It said valuation gains on investment properties, which real estate owners record as profits, would be lower than last year because rental increases will fall. 'The fair value gains on our properties in Hong Kong are expected to be significantly smaller than in 2009,' Swire Pacific said.
'This reflects our expectation that growth in market rents in Hong Kong is likely to be limited.'
Swire Pacific A shares fell 2 per cent to HK$91.95 yesterday, even though the company said underlying earnings at its property business, excluding property valuation gains, would rise 10 per cent to HK$4.23 billion.
Swire Pacific's investment properties assets were worth HK$183.8 billion at the end of March, the company said in the filing, compared with HK$154.1 billion in December.
It also disclosed the values of its major real estate assets, saying the shopping centre, offices, apartments and hotels at Pacific Place were worth HK$70.4 billion as at March 31 this year. Festival Walk was worth HK$16 billion while Taikoo Place was valued at HK$33.7 billion. More than 87 per cent of the firm's real estate is in Hong Kong, with the balance mainly on the mainland.
A person involved in the share sale said Swire Pacific began discussing the offering informally with potential investors yesterday.
He said the company's bankers would set a price range for the real estate arm's shares either this Friday or over the weekend and the formal investor roadshow would begin on Monday. The deal is expected to happen in mid-May.
A Swire Pacific spokeswoman declined to comment.
Swire Pacific shareholders will receive one share in the spun-off Swire Properties for every 10 A shares they hold, the company said on Sunday. Holders of B shares will receive one Swire Properties share for every 50 held.
Swire Pacific, which started life as a Liverpool import-export company, has interests in aviation, retail, beverages and shipping, as well as real estate.