Rents fall, properties are revalued, and established Hong Kong-owned real estate developers are under pressure
2024-08-14
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In the most recent performance reporting period, many Hong Kong-funded developers have seen performance decline or even losses. For example, Wharf Properties' shareholders' attributable profit was HK$1.052 billion, turning from profit to loss year-on-year; Swire Properties' interim shareholders' attributable profit decreased by 19% year-on-year, and the retail sales of many of its shopping malls declined...
When analyzing the reasons for the decline in performance, several Hong Kong-funded real estate companies mentioned that the slowdown in economic recovery, the impact of Hong Kong's tourism industry and market supply have caused a decline in rental income. The overall market downturn at the same time also put considerable pressure on the revaluation of companies' investment properties.
However, these have not stopped Hong Kong-funded real estate companies from continuing to invest. Some analysts believe that Hong Kong-funded real estate companies are operating steadily, have experienced several rounds of real estate cycles, have strong experience in operating through cycles, and have the spare capacity to seize investment opportunities and invest against the trend. Hong Kong-funded companies such as Swire Properties, Hang Lung Properties, and Sun Hung Kai Properties are still increasing their investment in the mainland market.
Property revaluation affects performance
The main reason for the losses of Hong Kong-funded real estate companies is the impact of the revaluation of investment properties held by the companies.
The revaluation gains and losses of investment properties are the net value differences of the commercial, hotel, office and other investment properties held by the enterprise after revaluation according to the fluctuation of fair market value during the reporting period, which are included in the current profit and loss. During the economic and industrial upswing, Hong Kong-funded developers holding many investment properties have achieved rich returns, but when market uncertainty intensifies, the revaluation gains and losses of investment properties will also fluctuate greatly, which will inevitably become a drag on performance.
Wharf Properties, which owns two well-known commercial complexes in Hong Kong, Harbour City and Times Square, is a developer with a long history. In the first half of this year, the company achieved revenue of approximately HK$6.501 billion, a slight increase of approximately 0.43% year-on-year; operating profit reached HK$4.915 billion, a decrease of only approximately 0.51% year-on-year.
Wharf Property's basic net profit actually reached HK$3.123 billion, an increase of about 2% year-on-year; if the impact of the revaluation impairment of investment properties is taken into account, that is, a reduction of HK$4.45 billion, the company's loss attributable to shareholders will be HK$1.052 billion, "reflecting weak asset values."
According to Wharf Properties, as of the end of June 2024, the company's total investment property assets were HK$223 billion, while the same period last year was about HK$227.4 billion. Among them, the valuation of Harbour City (excluding three hotels) was HK$151.6 billion, and the valuation of Times Square was HK$46 billion. In the same period of 2023, the valuations of the two major properties were HK$154.5 billion and HK$47.3 billion, respectively, with significant impairment changes. Wharf Properties management said that if the retail market continues to be weak, it is not ruled out that impairment will still be needed in the second half of the year.
Hang Lung Properties was also affected by this indicator. In the first half of this year, affected by market conditions, the company's rental income dropped significantly, resulting in a year-on-year decline of about 22% in basic net profit attributable to shareholders; if the revaluation of properties is included, both the mainland and Hong Kong property portfolios are included, the total loss is HK$634 million, causing the company's net profit attributable to shareholders to drop to about HK$1.061 billion, and the year-on-year decline has widened to more than 50%.
This is not the first time that Hang Lung has been dragged down by property revaluations. As early as the first half of 2020, affected by multiple factors such as falling rents, the epidemic and social unrest, Hang Lung's investment property revaluation losses reached HK$4.642 billion, of which the revaluation losses of properties in mainland China and Hong Kong were both over HK$2.3 billion. Affected by this, Hang Lung Properties' net profit attributable to shareholders was a loss of HK$2.537 billion; if this impact is deducted, the net profit attributable to shareholders should be a gain of HK$1.989 billion.
Since the properties cannot be converted into cash in the short term, the revaluation of investment properties will not actually cause losses to the company, but this indicator also reflects the impact of poor market conditions on asset values, and the company's main business is actually under pressure at the same time. Especially for Hong Kong-funded developers who hold and operate a large number of investment properties, rental income, as the main source of revenue, has declined slightly during the reporting period.
The Hong Kong office market faced a double blow from a weak economy and oversupply in the first half of this year, which put great pressure on rents. Hang Lung Properties' tenants concentrated in the Central area lowered their rents, resulting in a sharp drop of about 14% in the income of its office portfolio on Hong Kong Island; during the same period, the income of the office buildings of Harbour City and Times Square under Wharf Properties fell by 2% and 8% respectively.
With the increasing number of outbound tourism and the change in consumption patterns, the retail market is also under pressure. Hang Lung Properties' shopping mall rental income in the Mainland and Hong Kong fell by 6% and 7% respectively; the occupancy rate of all projects in Hong Kong under Swire Properties, another old Hong Kong-funded developer, reached 100%, but the overall rental income of this part still fell by 3% compared with the same period in 2023, totaling HK$1.198 billion; at the same time, the overall retail sales also fell by about 7%.
Still actively investing in the Mainland
The market is not good, and the traditionally stable Hong Kong-funded developers have slowed down their expansion. Hang Lung Properties Chairman Chen Wenbo admitted at the end of July that business operations must be cautious and it is not a good time to expand. At the same time, in order to cope with the challenging environment, the company also cut its interim dividend to retain more cash.
However, this does not mean that these developers are completely giving up investment opportunities.
Liu Shui, director of corporate research at China Index Academy, believes that Hong Kong-funded real estate companies have stable operations, low debt ratios, and strong risk resistance. Swire Properties and New World Development have been established for more than 50 years and have experienced several rounds of real estate cycles. They have strong experience in cross-cycle operations, stable operations, low debt ratios, and asset-liability ratios are generally around 40%. When the real estate market is running at the bottom of the cycle, these companies have the spare capacity to capture investment opportunities and invest against the trend.
In July, the Nanjing ifc shopping mall built by Sun Hung Kai Properties officially opened. Located in the central business district of Hexi in Nanjing, it brings together many luxury brands. The "Jinling Central" complex developed by Hong Kong Land in Nanjing Xinjiekou is also about to be completed and delivered.
Hang Lung Properties is also promoting investment in its own way: continuing to expand Shanghai Plaza 66. Chen Wenbo said that in Shanghai, competition is becoming increasingly fierce, and the purpose of expanding Plaza 66 is to provide more space to meet the needs of young people. "Take advantage of this period of macro market slowdown. If we can make our products better without spending too much money, we should actually speed up."
Hang Lung Properties disclosed that the expansion of Shanghai Hang Lung Plaza has been approved by the government. A retail building with a total floor area of approximately 3,000 square meters will be built using the existing landscaped area, which is expected to be completed in 2026. At the same time, Hangzhou Hang Lung Plaza, which is under construction, is also scheduled to be completed in phases starting in 2025.
Among them, Swire Properties has been the most active. In early August, the Shanghai Yangjing integrated development project jointly developed by Swire Properties and Lujiazui Group was officially named "Lujiazui Swire Source". The complex is located within the inner ring road along the Huangpu River in Pudong and is scheduled to open in phases from 2027. Swire Properties will also launch its first high-end residential brand in the mainland in the project, and the first batch of residences are scheduled to be pre-sold at the end of 2024.
Swire Properties CEO Peter Pang expects that the demand for luxury retail space in Guangzhou and Chengdu will remain strong. During this period, while upgrading Taikoo Li Chengdu and expanding the retail part of luxury brands in the project, Swire Properties also acquired the No. 387 Tianhe Road project in Guangzhou and renovated it as a new part of the high-end retail property portfolio of Taikoo Hui in Guangzhou, which will increase the building area of Taikoo Hui in Guangzhou by 43%. It is revealed that the renovation and renovation work will start before the end of this year and is expected to be completed in 2026.
This is just a microcosm of Swire Properties' increased investment in the Mainland. Peng Guobang said, "Our HK$100 billion investment plan has made good progress since it was announced in 2022, especially in the Mainland China market, which is the key to driving revenue growth and also has important strategic significance in the long-term expansion plan."
Swire Properties Chairman Bradley has set a goal for business expansion: to develop a total of 11 large-scale commercial projects dominated by retail in six mainland cities by 2027. He said that Swire Properties will continue to look for project development opportunities in first-tier and emerging first-tier cities, and double the total floor area in mainland China by 2032 according to the HK$100 billion investment plan.
(This article comes from China Business Network)
