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author: liang zhengyu

“everybody is in the same boat.”

when asked by investors about the sales performance of its high-end shopping mall harbour city in the first half of this year, wu tianhai, chairman and managing director of wharf real estate, replied, "our performance is consistent with the market. we did not outperform the market. there is not much difference between luxury goods and non-luxury goods. everyone is in the same boat."

the consumer market has entered an adjustment cycle, and high-end shopping malls have failed to break out of the independent market. the pressure of real estate market adjustment has begun to spread to hong kong-funded real estate developers, which have always been stable. hong kong-funded real estate developers behind high-end shopping malls such as landmark, pacific place, ifc, k11, and harbour city on both sides of the victoria harbour have to face the challenge of a downward market.

in the first half of this year, old hong kong-funded real estate developers represented by cheung kong group, hang lung properties, sun hung kai properties, and wharf property saw a decline in profits or even losses.

according to wind statistics, in the first half of this year, eight hong kong-funded real estate developers, including cheung kong group, new world development, hang lung properties, henderson land development, sun hung kai properties, swire properties, kerry properties, and wharf property, achieved a total operating income of approximately hk$103.3 billion, a year-on-year decrease of 18.64%; and achieved a net profit attributable to parent company shareholders of approximately hk$16.1 billion, a year-on-year decrease of hk$17.9 billion.

many real estate companies have expressed their concerns about the continued downward trend in their financial reports or performance meetings.

in its financial report, cheung kong group said that geopolitical pressure and trade conflicts continue to bring various challenges to the global economy; wharf properties pointed out that the business environment in hong kong remains difficult, with unfavorable exchange rate trends, high interest rates and staff shortages affecting business operations, and the retail and hotel industries suffering from the impact of changes in consumption patterns; hang lung properties chairman adrien chan admitted that "whether it is the stock price or the performance, there are some challenges and some pressure."

although performance is under pressure, most hong kong-funded real estate developers still expressed their long-term optimism about the future and invested at the bottom.

hang lung properties and hongkong land took advantage of the market adjustment period to expand and upgrade their shanghai plaza 66 and hongkong land in central. swire properties chairman bradley said that swire properties' hk$100 billion investment plan is progressing well, and more than 60% of the funds have been committed so far.

"despite the fatigue in core markets, especially the sluggish performance of hong kong's office market, we remain confident in the long-term growth of our own business in hong kong and mainland china, and are particularly optimistic about beijing, shanghai and the greater bay area," said bradley.

luxury brands line canton road in hong kong, photographed by a times weekly reporter in june 2024

rare loss

in the past three years, the operating income and net profit of hong kong-funded real estate companies have shown a downward trend, and the decline this year has been particularly obvious.

wind statistics show that in the first half of the fiscal year from 2022 to 2024, the total operating income of eight hong kong-funded real estate companies including cheung kong group and hang lung properties was hk$143.798 billion, hk$126.984 billion, and hk$103.311 billion, respectively, and the net profit attributable to parent company shareholders was hk$41.879 billion, hk$34.068 billion, and hk$16.141 billion, respectively, declining year by year.

in the first half of this year, the profits of many real estate companies fell by double digits, and some even suffered losses.

among them, cheung kong group's revenue was hk$22.008 billion, a year-on-year decrease of 10.55%, and its profit attributable to shareholders was hk$8.63 billion, a decrease of 16.47% from hk$10.331 billion in the first half of 2023. the reason for the decline in net profit is that the recognition of property sales revenue has decreased, resulting in a decrease in profit contribution. in the first half of the year, cheung kong group achieved property sales revenue of hk$4.635 billion, a year-on-year decrease of 43.79%; and realized revenue of hk$1.821 billion, a year-on-year decrease of 48.41%.

swire properties' revenue was hk$7.279 billion, roughly the same as last year, and profit attributable to shareholders was hk$1.796 billion, down 19% year-on-year. swire properties ceo peter pang said that despite a significant recovery in 2023, hong kong's retail portfolio was affected by a number of macroeconomic uncertainties during the period, and continued outbound tourism and changes in tourists' consumption habits had an adverse impact on the retail market.

hang lung properties' revenue was approximately hk$6.114 billion, up 17% year-on-year, and net profit attributable to shareholders was approximately hk$1.061 billion, down 55.68% year-on-year. hang lung properties ceo weber lo bluntly said in response to media questions, "if you ask me about the future prospects, we can't see through it, and we dare not look too far ahead for the time being. now is the time to protect our capital and our lives."

hongkong land, wharf property and new world development suffered rare losses.

in the first half of this year, hongkong land achieved revenue of us$972 million, up 45.1% from us$670 million in the same period last year, but its net loss attributable to shareholders widened to us$833 million from us$333 million in the same period last year.

wharf property's revenue was hk$6.501 billion, a slight increase of 0.43% year-on-year. the loss attributable to shareholders was hk$1.052 billion, a sharp drop of 158.28% compared with the profit of hk$1.805 billion in the same period last year.

wharf properties attributed the poor performance to the weak market. "while inbound tourism in hong kong is struggling, the increasing outbound tourism has further hit local consumption. in the first two months of this year, overall retail sales grew flat on a low base, and then a turning point occurred in march. the upward trend after the epidemic was halted and turned downward. retail sales in the second quarter even fell sharply by double digits."

new world development's performance forecast stated that due to the lack of revenue recognition for major projects completed and handed over in fiscal 2023, revaluation or impairment losses on investment and development properties and goodwill, recognition of losses on sales, as well as continued high interest rates and depreciation of the rmb during the year, it expects to record a loss attributable to shareholders (including continuing and discontinued operations) of between hk$19 billion and hk$20 billion in fiscal 2024.

huge loss on paper

there are two reasons for the decline in profits of hong kong-funded real estate developers: first, it has become more difficult to make money, as income from selling houses and collecting rents has shrunk; second, housing prices have fallen sharply, affecting the valuation of investment properties.

cheung kong group, swire properties and hongkong land are all well-known "big landlords" in hong kong, owning a large number of commercial properties in core areas such as central and tsim sha tsui. due to the sluggish market and oversupply, landlords who own luxury brands such as chanel, hermes and louis vuitton are also living a tight life.

office buildings in central, hong kong, photographed by times weekly reporter in june 2024

in the first half of this year, the retail sales of swire properties' hong kong retail property portfolio, pacific place, cityplaza and citygate outlets, fell by 13%, 4% and 3% respectively, and rental income fell by 3% year-on-year to hk$1.198 billion; in terms of the office property portfolio, due to the continuous increase in supply and weak demand, rents were under pressure, and rental income fell by 7% to hk$2.576 billion. the occupancy rate was 89% as of the end of june this year.

hang lung properties' rental business revenue in hong kong fell 8% to hk$1.548 billion. retail property revenue fell due to rent cuts by some major tenants in major commercial and tourist areas. in the face of a sluggish market, hang lung properties proactively lowered the rents of some office buildings, mainly involving tenants in central. revenue fell 14% and the occupancy rate was 83%.

the office occupancy rates of wharf property's two major commercial landmarks, harbour city and times square, were 88% and 87% respectively, with revenues down 2% and 8% and profits down 5% and 10% respectively. the commercial sector's profits continued to increase slightly thanks to the 16 luxury brands on harbour city's 530-meter-long street-front stores facing canton road, which continued to attract many customers to visit for shopping.

"there is currently an oversupply of all property types, but we hope that demand will pick up once cyclical factors such as exchange rates and interest rates improve," said wharf property.

the shrinking book value of investment properties has had a negative impact on current profit performance and is the main reason for the weakening profitability of hong kong-funded real estate companies.

the revaluation gains and losses of investment properties are the net value differences of commercial, hotel, office and other investment properties held by enterprises after revaluation according to the fluctuation of fair market value during the reporting period, which are included in the current profit and loss. when the industry is under pressure and the fair value of investment properties decreases, the performance of real estate companies will inevitably be affected.

the significant decline in the fair value of investment properties is the main reason why wharf properties' performance turned from profit to loss. according to wharf properties' announcement, as of the end of june this year, its total investment property assets were hk$223 billion, resulting in a 2% revaluation impairment. among them, the valuation of harbour city (excluding three hotels) dropped by hk$2.9 billion to hk$151.6 billion, and the valuation of times square dropped by hk$1.3 billion to hk$46 billion.

after accounting for the revaluation impairment of investment properties, wharf properties' shareholders' attributable profit was a loss of hk$1.052 billion; if the impairment impact is excluded, overall revenue and profit are basically the same as the same period last year. wharf properties' management said that if the retail market continues to perform weakly, it is not ruled out that impairment will still be needed in the second half of the year.

it is worth noting that wharf properties pointed out in its financial report that the group's net asset value was 16% lower than five years ago.

hongkong land, which posted a loss of us$830 million, also attributed its poor performance to impairment provisions.

hongkong land said that changes in the mainland real estate market environment have prompted the group to conduct a comprehensive review of the pricing of development projects and set aside non-cash provisions totaling us$295 million. the affected projects are mainly located in non-prime locations in wuhan, nanjing and chongqing.

"these provisions are only required when the expected sales price based on market comparable prices is lower than the book value." excluding the impact of non-recurring provisions, hong kong land's profit attributable to shareholders in the first half of this year was us$288 million, which was a year-on-year decrease of 31.75% but still profitable.

new world development, which has a large stake in mainland china, also suffered huge paper losses.

as of the end of 2023, new world development's total land reserves in the mainland are approximately 4.35 million square meters, and its core property development projects are mainly distributed in cities such as guangzhou, shenzhen, foshan, wuhan, ningbo, and shenyang. affected by the correction in housing prices, new world development will make a one-off non-cash revaluation or impairment loss in fiscal 2024, with a total amount of between hk$8.5 billion and hk$9.5 billion, and it is expected to record a loss attributable to shareholders of between hk$19 billion and hk$2 million.

however, making impairment provisions for investment properties is a routine operation for real estate companies to release risks in advance, rather than a fundamental problem at the operational level.

swire properties recorded a fair value loss of hk$879 million on investment properties in the first half of this year, compared with hk$1.635 billion in the same period of 2023. "the change in the fair value of investment properties is non-cash in nature and will not have any impact on the company's operating cash flow or basic profit attributable to shareholders," said bradley.

bottom-fishing investment

for most hong kong-funded real estate developers, the current difficulties are just a ripple in their decades or even hundreds of years of development. the "old captains" who are used to the wind and waves have added investment at the bottom of the market, hoping to seize the opportunity of market rotation.

"swire properties' confidence in the long-term prospects of the mainland china market is reflected in the planned investment projects." mr. bradley said that swire properties' hk$100 billion investment plan is progressing well, and more than 60% of the funds have been committed to date. among them, hk$50 billion will be invested in the mainland market to further expand and upgrade existing projects; hk$30 billion will be invested in the hong kong market to expand the core commercial property portfolio of taikoo place and taikoo plaza; and hk$20 billion will be invested in multiple new markets in hong kong, the mainland and southeast asia to develop residential sales projects.

swire properties' investments in the mainland are mainly located in shanghai, xi'an, sanya, guangzhou and beijing.

in shanghai, swire properties has landed two large-scale complex projects, the shanghai qiantan comprehensive development project and the shanghai yangjing comprehensive development project. shanghai has become the city with the largest scale of swire properties' business in the mainland. in guangzhou, swire properties cooperated with guangzhou zhujiang industrial group to build the retail part of a large-scale comprehensive development project in the julongwan area of ​​liwan. in august this year, it won the tianhe road 387 project, which was renovated as a new part of the high-end retail property taikoo hui, increasing the building area of ​​taikoo hui by 43%.

peng guobang said that swire properties' hk$100 billion investment plan has made ideal progress since it was announced in 2022, especially in the mainland china market. the mainland china market is key to driving revenue growth and also has important strategic significance in the long-term expansion plan.

"to develop 11 large-scale commercial projects dominated by retail in six mainland cities by 2027" - this is the goal set by bradley for swire properties.

hang lung properties chose to expand shanghai henglong plaza.

chen wenbo said that competition in shanghai is becoming increasingly fierce, and the purpose of the expansion of hang lung plaza is to provide more space to meet the needs of young people. "if we can make our products better without spending too much money during the slowdown of the macro market, we should actually speed up the process."

hongkong land announced the launch of the "tomorrow's central" project at the end of june, planning to invest more than us$400 million to expand and upgrade the retail property portfolio of landmark plaza to bring customers a top luxury shopping experience. in addition, many existing luxury brand tenants of landmark plaza, such as chanel, hermès, tiffany, dior, etc., will also invest an additional us$600 million to participate in the project design and create a brand new experience.

in contrast, cheung kong group, with a net debt to total net capital ratio of only 5.5%, is more conservative. li zeju, chairman of cheung kong group, said that cheung kong is patient and never has a "must win" mentality. "when there are huge investment opportunities in hong kong or the mainland, we have the ability to use a large amount of funds to invest at any time."

although management has collectively expressed confidence at performance meetings and in financial statements, expressing optimism about the long-term positive market outlook, the current difficulties are also objectively real.

institutions such as jpmorgan chase and citibank have given neutral ratings to a number of hong kong-funded real estate developers.

based on its assessment of cheung kong group's future profit prospects, citibank lowered its target price for cheung kong group from hk$36 to hk$33.5. citibank said that as a major real estate developer in hong kong, cheung kong group has many projects under construction and planning. however, changes in the market environment and uncertainty in project progress may have an impact on the company's profitability.

wu tianhai also said, "we don't expect there will be any big surprises in the second half of this year."