TCT – BT

Treasury China allays fears over supply glut

Trust upbeat on office, retail rentals, citing strong demand in China

TREASURY China Trust (TCT) expects further upside in office and retail rental rates on the back of strong demand in China and dismisses concerns over a potential office supply glut in Shanghai raised by a brokerage report.

TCT chief executive Richard David said the group is looking at 10-12 per cent rental price growth this year, similar to the growth pace in the past three years.

A 21 per cent rise in Shanghai’s Grade A office rents projected by Jones Lang LaSalle in a report late last year also looks achievable.

‘Based on transactions that we have done in the first half of this year, we don’t think this is an unrealistic number,’ Mr David told BT.

‘What we are seeing over the last 12 months in our portfolio is stronger rental growth, so as we are headed for the next 12-24 months, there are leases up for renewal and I think we are in a very good position.’

A recent report by Phillip Securities cited office supply glut in Shanghai as the main threat to TCT, given that one million square metres of new office supply is expected to come onstream this year – about three times the average historical annual supply.

Apart from concentration risk in Shanghai, Phillip Securities also cited higher borrowing costs amid an interest rate hike and credit tightening in China as factors weighing on TCT.

‘These are legitimate questions to answer,’ Mr David said. Fund managers and investors have sought updates from the group since. But there are several mitigating factors, he said.

TCT’s properties are located in the less cluttered district of Puxi, where only 21 per cent of the new office supply are located, he added.

High capital costs and disruptions to business also hold companies back from relocating to new office space.

The bigger risk to TCT, Mr David reckoned, is any major loss of staff to deal with rental renewals effectively.

‘That’s probably more of an issue for me than to worry about the guy who is building 50,000 sq m down the road because he should be worried about us. I’m not worried about him, because I know we have a very compact business structure.’

Mr David also explained that TCT’s borrowing costs is cushioned from the impact of rising interest rates in China, as only 15 per cent of its debt are in yuan and 85 per cent of its debt are US dollar loans.

TCT’s current portfolio comprises Central Plaza, City Center, and Treasury Building in Shanghai Puxi and the 74,000-square-metre development space in Beijing International Logistics Park.

With its Shanghai properties enjoying over 90 per cent office occupancy, the business trust is seeking expansion space for its tenants.

It has also set aside one billion yuan (S$190 million) for acquisitions of retail assets it has identified in Shanghai and Xi’an.

The recent acquisitions of a 55 per cent interest in Central Avenue Mall in Qingdao and a 100 per cent interest in Huai Hai Mall in Shanghai are expected to boost the group’s gross revenue by 15 per cent, Mr David said.

TCT had, in the first quarter ended March 31, achieved gross revenue of $19.45 million, 1.9 per cent above forecast, and a net property income of $12.45 million, exceeding its forecast by 8.6 per cent.