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Source: Times Finance Author: Zhong Dai

After entering the mainland market for more than 20 years, Hong Kong-funded real estate developers have led the consumption trends in first-tier cities. However, the performance base of Hong Kong-funded real estate developers is quietly changing, and they urgently need to find growth points in the new first-tier, second-tier and third-tier cities in the mainland.

A typical example is Hang Lung Properties (00101.HK). Hang Lung Properties just completed the handover this year, and Chen Wenbo took over the responsibility of chairman from his father.

On July 30, Hang Lung Properties' 2024 interim results signed by Chen Wenbo showed that the company's total revenue for the period was HK$6.114 billion, a year-on-year increase of 17%; the basic net profit attributable to shareholders was approximately HK$1.735 billion, a year-on-year decrease of 22%; if the property revaluation loss is taken into account, the net profit attributable to shareholders is approximately HK$1.061 billion, a year-on-year decrease of approximately 56%.

Chen Wenbo said that in the past 12 months, with the significant increase in the number of outbound tourists from first-tier cities in the Mainland, especially those traveling to Japan (the depreciation of the yen has made local luxury goods prices about 30% cheaper than in the Mainland), coupled with the softening of consumer confidence in the Mainland, domestic luxury consumption has returned to normal levels, and Hang Lung Properties' performance has therefore declined.

After the release of the semi-annual report, Hang Lung Properties' share price plummeted in the afternoon of July 30, falling to a low of HK$5.42 per share, a drop of 15% at one point. As of the close of July 30, Hang Lung Properties' share price was HK$5.64, a drop of 11.74%, a new low since 2007.

Swire Properties (01972.HK) is in a similar situation. In 2023, the company's basic profit attributable to shareholders was HK$11.57 billion, a year-on-year increase of 33%, but this was mainly due to the profit achieved from the sale of an office building in Hong Kong. Its recurring basic profit attributable to shareholders was HK$7.285 billion, a year-on-year increase of 2%.

In the first quarter of this year, operating data released by Swire Properties showed that retail sales of its six shopping malls in the Mainland fell across the board, with only the retail sales of Taikoo Li Qiantan in Shanghai increasing slightly by 0.7%.

Performance fundamentals challenged

Hang Lung Properties is the main business of Hang Lung Group (00010.HK). In the first half of this year, Hang Lung Properties' revenue continued to grow, mainly due to the increase in property sales revenue.

As the main source of income for Hang Lung Properties, property leasing revenue decreased by 7% year-on-year to approximately HK$4.886 billion, of which the mainland's property leasing revenue decreased by 6% to approximately HK$3.338 billion and the Hong Kong property leasing revenue decreased by 8% to approximately HK$1.548 billion.

Hang Lung Properties said in its financial report that after a strong rebound in the first half of 2023, the market momentum of luxury retail consumption in the mainland has weakened, and the market has slowed down and has not improved until 2024. In the first half of this year, the company's revenue from shopping malls in the mainland fell 3% year-on-year, and tenant sales in the malls fell 13%.

Hang Lung Properties operates a total of 10 shopping malls in the mainland, and its two flagship projects in Shanghai have fallen sharply. In the first half of this year, the overall revenue of Shanghai Hang Lung Plaza was 819 million yuan, down 8% year-on-year, and the tenant sales fell by 23% year-on-year. The overall revenue of Shanghai Grand Gateway 66 in the first half of the year was 589 million yuan, down 4% year-on-year, and the tenant sales fell by 14% year-on-year.

Hang Lung Properties' other key projects in new first-tier and second-tier cities performed relatively steadily, but there was not much growth. In the first half of this year, the revenue of Wuxi Hang Lung Plaza was HK$226 million, unchanged year-on-year; the revenue of Jinan Hang Lung Plaza was HK$158 million, up 1% year-on-year; the revenue of Kunming Hang Lung Plaza was RMB 152 million, down 1% year-on-year.

As for Swire Properties, in the first quarter of this year, the retail sales of its shopping mall Shanghai Xingye Taikoo Hui fell the most, reaching 19.4%; the retail sales of Chengdu Taikoo Li fell by 14.7%; the retail sales of Swire Properties' first project in the mainland, Beijing Sanlitun Taikoo Li, also fell by 5.4%.

Chinese people have always been an important force in luxury consumption. According to Yaoke Research Institute, in 2023, "Chinese luxury consumption" will reach 1.042 trillion yuan, with a growth rate of 9%. Overseas luxury consumption by Chinese people accounts for 42%, and Asian countries such as Japan, South Korea, and Thailand are the most popular overseas luxury shopping destinations for Chinese people.

The agency believes that in the next 3-5 years, the contribution of Chinese consumers to the global luxury industry will become more prominent, most brands will normalize discounts in the Chinese market, and China will become the cheapest place in the world to buy luxury goods. In 2024, the outflow of Chinese luxury consumption will be further curbed.

However, judging from the performance of high-end shopping mall operators such as Hang Lung Properties and Swire Properties, domestic luxury consumption may not be as good as expected at this stage.

In addition, Kering and LVMH both pointed out in their first quarter reports that sales in the Asia-Pacific market, excluding Japan, fell, while sales in the Japanese market grew. This phenomenon is related to the depreciation of the yen, and a large number of tourists went to Japan to buy luxury goods because of the widening price difference. LVMH also said that the proportion of outbound consumption by Chinese consumers increased to 37% in the first quarter.

A report released by Jefferies in May this year believes that with the recovery of cross-border tourism, the weakness of the yen and fierce market competition, Hang Lung Properties' rental income may decline this fiscal year. "2024 will be a challenging year for Hang Lung Properties. Investors need to re-examine its growth potential, especially in the context of retail sales returning to normal."

The bank lowered its earnings forecast for Hang Lung Properties from 2024 to 2026 by 13% to 28%.

Fighting in new first-tier cities

Whether the several reserve shopping malls in the new first-tier cities can deliver outstanding results has become a key battle for Hang Lung Properties.

"The Hang Lung Plaza in Hangzhou may be the best one among all the Hang Lung Plazas we have built in the past. It has both accumulated experience from the past and new product iterations," said Ronnie Chan, former chairman of Hang Lung Properties.

In May 2018, after 336 rounds of competition, Hang Lung won the Baijingfang plot in Hangzhou's Wulin business district with a total price of 10.7 billion yuan, setting a new record for the total price of commercial plots in Hangzhou at that time. The floor price was 55,285 yuan per square meter, with a premium rate of 118.51%, which also set a new record for the floor price per square meter in Hangzhou's land market.

Public information shows that the Hang Lung Hangzhou project, built on the Baijingfang site, is positioned as a luxury landmark in East China, benchmarked against internationally renowned neighborhoods such as Tokyo's Ginza, and is expected to be completed in phases starting in 2024.

Currently, the city has three commercial complexes, Hangzhou Tower, Hubin Yintai in77 and MixC, which have attracted luxury brands to settle in, with one each in the three major business districts of Wulin, Hubin and Qianjiang New Town. It is foreseeable that Hang Lung's Hangzhou project will face considerable competitive pressure.

Specifically in the Wulin business district, Hang Lung's Hangzhou project will directly compete with Hangzhou Building, the earliest luxury gathering place in Hangzhou, and at the same time, it will be seamlessly connected with Wulin Intime to the west.

In the next few years, Hangzhou will have a large number of high-end commercial projects entering the market. Hangzhou IFC, which Sun Hung Kai Properties (00016.HK) has participated in building, is scheduled to open in phases starting from 2025. In addition, Hangzhou SKP, Hangzhou K11, Hangzhou Center MixC and other projects will also open one after another next year.

Hang Lung also has a presence in Nanjing, where Nanjing Deji Plaza was once the "luxury overlord". According to Winshang.com, the project will achieve sales of 23.9 billion yuan in 2023, a year-on-year increase of 13.8%.

However, many Hong Kong-funded real estate developers want to get a piece of the pie. Jinling Central, a commercial project operated by Hongkong Land, is located in the same Xinjiekou business district as Deji Plaza and is under construction. In late July, Nanjing IFC Mall, operated by Sun Hung Kai Properties, officially opened, with a large number of luxury brands. Hang Lung is not far behind, and the third phase of Nanxi Hang Lung is expected to be completed in 2025.

Swire Properties' representative works in new first-tier cities include Taikoo Li Chengdu. Currently, the company's latest focus city is Sanya.

In 2023, Yunjie Island in Haitang Bay, Sanya (tax included), jointly built by Swire Properties and China Tourism Group, a shareholder of China Duty Free Group (601888.SH), will open for business. It will be home to many luxury goods, including LV's first store in Hainan.

In addition, according to local media reports, the third phase of the Sanya International Duty Free City project, jointly built by Swire Properties and China Duty Free Group, has started construction. The first batch may be completed by the end of 2025, and the total investment in the project has reached 7 billion yuan.

It is worth noting that even with the support of Hainan Free Trade Port and off-island duty-free policies, Hainan's tourism retail industry is facing the diversion of Chinese outbound tourism consumption.

According to data from Haikou Customs, in the first five months of this year, the actual number of people who shopped duty-free on Hainan's offshore islands under the supervision of Haikou Customs was 3.004 million, a year-on-year decrease of 9.72%. The amount of duty-free shopping was 16.91 billion yuan, a year-on-year decrease of 29.57%.

Competition in Hainan's tourism retail industry has also become increasingly fierce. According to Hainan Province, from 2020 to May this year, the number of Hainan's offshore duty-free operators increased from 1 to 7, and the number of offshore duty-free shops also increased from 4 to 12.

It remains to be seen whether Hong Kong-funded real estate developers such as Hang Lung Properties and Swire Properties can maintain their competitiveness in the face of changes in the industry and competitive landscape.