Hong Kong-funded real estate companies such as Cheung Kong Holdings saw declining performance, and changes in the fair value of investment properties "dragged down" their performance
2024-08-16
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On August 15, Cheung Kong Group announced its interim results for 2024. According to the announcement, Cheung Kong Group's revenue in the first half of the year was HK$22.008 billion, a year-on-year decrease of 10.55%; the profit attributable to shareholders was HK$8.603 billion, a year-on-year decrease of 16.7%.
In addition to Cheung Kong Group, a number of Hong Kong-funded real estate developers including Hang Lung Properties, Swire Properties, Wharf Property and Hongkong Land have also recently disclosed their semi-annual results, and their profit performances have all shown a decline or loss.
In this regard, Song Hongwei, research director of Tongce Research Institute, said, "The decline in asset prices, the decline in occupancy rates, and the downward pressure on leasing have led to a reduction in the fair value of real estate companies' assets, which has also brought great pressure on the company's operations."
Profits of Cheung Kong Group, Hang Lung Properties and others declined
The performance of Hong Kong-funded real estate developers, which have always been stable, has begun to become unstable in the first half of this year.
The Cheung Kong Group, which just released its financial report, saw both revenue and profit decline. The decline in revenue was mainly due to the decline in property sales. In the first half of 2024, property sales revenue was HK$4.633 billion, a year-on-year decrease of 43.78%. From a regional perspective, the main reason for the decline in revenue was Hong Kong and the Mainland.
In addition to the decline in revenue that directly led to a decline in Cheung Kong Group's profits, there are also some factors that affected its profit level, such as a loss of HK$207 million in financial instruments in the first half of the year, compared with a loss of HK$4 million in the same period last year, and an increase in the fair value of investment properties by HK$1.42 billion, compared with HK$2.69 billion in the same period last year.
At the same time, the performance of Hang Lung Properties and Swire Properties also declined.
In the first half of this year, Hang Lung Properties' revenue increased by 17% to HK$6.114 billion. Among them, affected by the three major factors of weak luxury consumption in the mainland, slowing retail and office market conditions in Hong Kong, and depreciation of the RMB against the Hong Kong dollar, Hang Lung Properties' property rental income fell by 7% to HK$4.886 billion during the period.
In terms of profitability, Hang Lung Properties recorded a net profit of approximately HK$1.061 billion in the first half of the year, down approximately 55.72% year-on-year; net profit attributable to shareholders was HK$1.735 billion, down 22% year-on-year.
Regarding the decline in net profit attributable to shareholders, Hang Lung Properties stated in its financial report that the main reasons were the decline in leasing business profits and the increase in financial expenses. In addition, affected by the property revaluation losses, net profit attributable to shareholders also declined to a certain extent.
Swire Properties achieved operating income of HK$7.279 billion in the first half of this year, down 0.25% year-on-year. From the perspective of income structure, property investment income was HK$6.727 billion, accounting for 92.4%. In terms of breakdown, office building income declined, while retail property income increased.
In terms of profit, in the first half of the year, basic profit attributable to shareholders of Swire Properties was HK$3.857 billion, a decrease of 1% year-on-year; profit attributable to shareholders was HK$1.796 billion, a decrease of 19.21% year-on-year.
According to analysis, the decline in Swire Properties' profits was mainly due to changes in the fair value of investment properties. The financial report shows that after deducting non-controlling interests, Swire Properties' investment property fair value loss was HK$879 million in the first half of the year, and the fair value loss in the first half of 2023 was HK$1.635 billion. The fair value losses in these two periods mainly came from the Hong Kong office building portfolio.
According to Swire Properties' financial report, its investment properties in Hong Kong suffered a fair value loss of HK$2.702 billion in the first half of the year, while it recorded a profit of HK$1.63 billion in the Mainland and HK$241 million in the United States.
Swire Properties said that the post-epidemic recovery of the Hong Kong office market is slower than expected, and the market is expected to remain weak in the rest of 2024, and rental levels will continue to be under pressure. In the future, it will attract local customers and tourists through merchant portfolio optimization, marketing promotion and membership reward programs to offset the negative impact of changes in outbound travel and tourist consumption patterns.
Wharf Real Estate and Hongkong Land suffered losses in the first half of the year
It is worth noting that Wharf Property and Hongkong Land suffered losses in the first half of the year.
In August, Wharf Properties released its semi-annual results. According to the announcement, Wharf Properties' revenue in the first half of the year was HK$6.501 billion, a year-on-year increase of 0.43%. In terms of profitability, Wharf Properties' unaudited basic net profit was HK$3.123 billion, up 2% year-on-year. If the revaluation impairment of investment properties is included, Wharf Properties turned from profit to loss in the first half of the year, and the shareholders' share of the group's loss was HK$1.052 billion, compared with a profit of HK$1.805 billion in the same period last year, a significant decline.
According to the announcement, in the first half of this year, the net impairment of Wharf Property was HK$4.426 billion, compared with HK$1.133 billion in the same period last year.
Regarding the performance, Wharf Properties said that the business environment remains difficult, and the unfavorable exchange rate trend, high interest rates and staff shortages have affected the ability to operate the business. In the first two months of this year, overall retail sales grew flat on a low base, and then a turning point appeared in March. The upward trend after the epidemic was suspended and turned downward. Retail sales in the second quarter even fell sharply by double digits. The office market is hit by economic weakness and oversupply, and rent adjustments are expected to continue until the business environment improves. The hotel industry has not yet fully recovered, and house prices have fallen after rising in the early days of the border reopening at the beginning of last year.
Another company that suffered losses was Hong Kong Land. Its financial report for the first half of 2024 showed a loss of US$830 million, with a basic loss of US$7 million, compared with a basic profit of US$422 million in the same period last year.
Hongkong Land attributed this to a non-cash provision of $295 million on the books of some of its development properties. Excluding the provision, underlying profit was $288 million, down 32% from a year earlier. Despite weak office leasing demand in Hong Kong and low levels of new enquiries, its mid-market portfolio remained resilient.
Hong Kong-funded real estate companies' performance adjustments may continue
It can be seen that the decline in performance of some Hong Kong-funded real estate companies is mainly due to changes in the fair value of investment properties.
For investment properties, if the market goes up, the fair value of investment properties will also go up. If the market price goes down, the fair value of investment properties will also go down. In accounting treatment, the gains from fair value appreciation should be included in the current period's profit and loss. Therefore, when the fair value of investment properties suffers a loss or declines, it will inevitably drag down performance.
"It is mainly because the valuation of their held properties has become lower, which has brought about fair value changes in gains and losses. When real estate prices rise rapidly, the fair value continues to increase. Similarly, when prices fall, the fair value will also decrease. However, this part of the gains and losses are "virtual" for the company and will not result in actual losses. Therefore, excluding this part of the impact, the profitability of Hong Kong-funded real estate companies in the first half of this year is still relatively good." Yu Xiaoyu, general manager of the E-House Think Tank Research Center, said that the other side of the decline in the valuation of held properties is a reflection of the varying degrees of decline in rents and occupancy rates, and the pressure on property management is also gradually increasing. The operation of held properties is also closely related to the economic situation. Against the backdrop of consumption downgrade, Hong Kong-funded companies that hold mid-to-high-end properties will also face pressure on future profits.
On July 8, CBRE's latest report "Hong Kong Commercial Real Estate Market View in the First Half of 2024" pointed out that the slow recovery of inbound tourism, continued high financing costs and geopolitical uncertainty will continue to be the main theme in the first half of 2024. Against this background, the Hong Kong commercial real estate market is generally weak.
"In the mainland, taking Shanghai Xingye Taikoo Hui as an example, retail sales fell by 19.6%, and the occupancy rate dropped from 93% in 2023 to 92% in June 2024, and this is when prospective tenants who have signed letters of intent are included," said Yu Xiaoyu.
Song Hongwei, research director of Tongce Research Institute, also believes that due to the impact of the external economic environment, there is now a clear trend of consumption and office consumption downgrades, and the operating costs of holding properties have not decreased, and are even rising. As a result, the current situation of increased revenue but not increased profits in the operation of holding properties is quite obvious, and the decline in corporate property leasing income is also quite obvious, which has a significant impact on the group's finances. "The decline in asset prices, the decline in occupancy rates, and the downward pressure on leasing have led to a reduction in the fair value of real estate companies' assets, which has also brought great pressure to the company's operations."
Will this phenomenon continue? Liu Shui, director of corporate research at China Index Academy, believes that the performance of some Hong Kong-funded real estate companies has declined due to the adjustment of the mainland real estate market. The losses of Hong Kong-funded real estate companies will continue for a while. The greater the proportion of mainland business income, the greater the impact. In the future, we expect the mainland real estate market to stabilize and rebound, and the performance of these real estate companies will also improve accordingly.
Song Hongwei believes that from the perspective of the security of global asset allocation, core cities in the mainland still have absolute advantages. For example, the luxury housing market in cities such as Shanghai and Beijing is hot and has developed an independent trend with considerable profit margins. Many real estate companies are actively planning high-end improvement projects in these core cities.
Beijing News reporter Duan Wenping
Edited by Yang Juanjuan and proofread by Yang Li
