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hong kong-funded real estate developers, which are good at navigating industry cycles, have seen a decline in performance or even turned from profit to loss in the first half of this year.

on august 30, new world development (hk00017, share price hk$6.63, market value hk$16.685 billion) released its earnings forecast. based on the preliminary review of the group's unaudited consolidated management accounts for the year ended june 30, 2024 (fiscal year 2024), new world development's overall profitability was affected by impairment losses, and it is expected that the annual profit for fiscal year 2024 may fall by 18% to 23% to hk$6.5 billion to hk$6.9 billion.

"daily economic news" reporters noticed that in addition to new world development, many hong kong-funded real estate companies, including cheung kong group (hk01113, share price hk$30.55, market value hk$106.9 billion), hang lung properties (hk00101, share price hk$5.61, market value hk$26.437 billion), swire properties (hk01972, stock price hk$13.540, market value hk$79.209 billion), and wharf property (hk01997, share price hk$21.20, market value hk$64.368 billion), have all seen their interim results this year affected by multiple factors such as the decline in mainland real estate development business, property revaluation impairment, and sluggish office and retail markets.

however, excluding the impact of property revaluation impairment provisions, the mid-term financial data of most hong kong-funded real estate developers this year are relatively stable, their debt ratios are generally lower than those of the vast majority of real estate developers in the mainland, and their cash flow is relatively sufficient.

an industry expert said in an interview with the reporter of china business network that when the market is pessimistic about the prospects of the real estate industry, the impairment of investment properties may affect investor confidence. "the performance fluctuations of hong kong-funded real estate companies are more affected by short-term market fluctuations. in the long run, they will still regard the mainland as an important development opportunity."

property revaluation losses dragged down performance

the so-called investment property revaluation gains mainly refer to the net value differences incurred after revaluation of commercial, hotel, office and other investment properties held by enterprises according to the fluctuations of fair market value during the financial reporting period, which are included in the current profit and loss and reflect the asset quality and asset value return of the investment properties.

in the past, whether it was hong kong-funded or mainland-funded real estate developers, their performance was generally boosted by investment property revaluation gains when the market was booming. however, in the current sluggish market, the volatility of investment property revaluation gains of real estate developers has intensified, which has also had a more obvious impact on the reduction of net profit and net profit attributable to shareholders.

the interim report shows that 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, the main reason for the decline was the decline in rental operating profit and the increase in financial expenses.

in addition, hang lung properties recorded a property revaluation loss of hk$634 million in the first half of the year, compared with a revaluation gain of hk$251 million in the same period last year. both mainland and hong kong properties recorded revaluation losses.

looking at kerry properties (hk00683, share price hk$14.02, market value hk$20.367 billion), the company's profit attributable to shareholders in the first half of the year also halved year-on-year, mainly due to the one-off provision made for certain land held by it in the kwu tung north new development area and the non-cash fair value changes of investment properties. the fair value of its investment properties also turned from profit to loss year-on-year.

liu shui, director of corporate research at china index academy, pointed out that the performance of some hong kong-funded real estate companies has declined due to the adjustment of the mainland real estate market. for example, 70% of the business income of wharf properties and hang lung properties comes from the mainland, half of the property sales of new world development comes from the mainland, and a considerable part of swire properties' revenue comes from mainland investment. the mainland real estate market has undergone drastic adjustments, and the vacancy rate of office buildings and shopping malls in some key cities has increased, and the pressure on rent reduction is relatively large, which has greatly affected the performance of these hong kong-funded real estate companies.

wharf real estate and hongkong land directly suffered net losses attributable to their parent companies. hongkong land's loss widened to us$830 million during the reporting period due to a one-time provision of us$295 million for development properties in the mainland.

the preliminary results of the annual independent revaluation of new world development's investment and development properties, including goodwill assessment, show that a one-off non-cash revaluation or impairment loss of hk$8.5 billion to hk$9.5 billion will be required in fiscal year 2024. the above-mentioned asset fair value changes and impairment losses are non-cash in nature and will not have any impact on the company's core operating profit or operating cash flow.

huang lichong, president of huisheng international capital, said that property revaluation impairment is a non-cash financial adjustment in accounting treatment, which reflects the change in the market value of the investment properties held by the company. if the market environment is not good, such as a downturn in the real estate market, the fair value of the property may decline, resulting in the need for impairment treatment. although this impairment will affect the company's net profit, it does not directly affect the company's cash flow. therefore, some people believe that property revaluation impairment has little impact on normal operations and cash flow, which is correct to a certain extent.

at the same time, huang lichong also reminded that attention should be paid to the overall trend of the hong kong real estate market, as its trend is an important factor affecting the future earnings and balance sheet health of hong kong real estate companies.

the debt ratio is still low and the cash flow is sufficient

if the revaluation of investment properties is excluded, the mid-term performance of the vast majority of hong kong-funded real estate developers is still fluctuating within a reasonable range compared with the same period last year.

in the first half of the year, cheung kong group's profit before revaluation of investment properties was hk$6.726 billion, and earnings per share were hk$1.91, a decrease of 9.5% from the same period last year; the debt ratio was only 5.5%.

kerry properties' debt ratio in the first half of the year was 40.9%, with cash and bank deposits totaling hk$12.365 billion and liabilities due within one year of approximately hk$7.918 billion. excluding one-off provisions and non-cash fair value changes in investment properties, its underlying profit decreased by 19% year-on-year to hk$1.403 billion.

excluding the impact of the revaluation of investment properties and the mark-to-market of certain financial instruments, wharf property's basic net profit in the first half of the year increased by 2% year-on-year to hk$3.123 billion, with basic earnings per share of hk$1.03, and the net debt to total equity ratio dropped to 18.3%.

as of the first half of the year, hang lung properties' net debt ratio was 32.9%, with total cash and bank deposit balances of hk$6.573 billion, undrawn balances of standby bank committed credit of hk$14.255 billion, and liabilities due within one year of hk$6.011 billion.

in fact, around 2020, affected by factors such as the epidemic, many hong kong-funded real estate developers suffered significant losses in the revaluation of their investment properties. as a result, hang lung properties suffered a loss in 2020, but its performance in 2021 quickly turned from loss to profit.

however, there are also hong kong-funded real estate developers that have performed stably in the revaluation of investment properties. cheung kong holdings' property revaluation profit in the first half of the year was hk$1.88 billion, which was due to the revaluation profit recorded by hutchison logistics center offsetting the revaluation losses recorded by some properties in the mainland.

swire properties' investment property fair value loss in the first half of the year was hk$879 million, a significant narrowing from the loss of hk$1.635 billion in the same period last year. among them, swire properties' investment property fair value in hong kong recorded a loss of hk$2.7 billion, while the fair value of investment properties in mainland china and the united states gained hk$1.63 billion and hk$240 million respectively.

liu shui added that in the past one or two years, some hong kong-funded real estate developers have been increasing their investments in the mainland. for example, swire properties previously formulated an investment plan of hk$100 billion, with hk$50 billion invested in the mainland market. it will continue to look for project development opportunities in first-tier and emerging first-tier cities, and double the total floor area in the mainland by 2032.

at the 2024 interim results investor conference, li zeju, chairman of cheung kong group, stressed: "i dare not bet that the hong kong market will be too bad. past history tells us that anyone who bets that hong kong will be bad in the long run is wrong. if there are good investment opportunities in hong kong, it will be easy for us to raise funds with international assets to return to hong kong. simply put, because we have international assets, when there are huge investment opportunities in hong kong or the mainland, we can have the ability to mobilize large amounts of funds to invest at any time."

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