Welcome to the Hang Lung Group and Hang Lung Properties annual results presentation. It is my pleasure to introduce to you the speakers for today, Mr. Ronnie Chan, our Chairman, Mr. Philip Chen, the Chief Executive Officer, Mr. H.C. Ho, Chief Financial Officer, and Mr. Adriel Chan, Executive Director. Can I pass the mic to Ronnie?
Well, a couple of things. From the stock price since the announcement, I guess you do not like it. I know a lot of people were expecting us to up the dividend by a penny. A number of you have written about it. I just remind you that six months ago, I wrote about why the board wants to be on the conservative side. I wrote about it six months ago. You chose to not believe me. It is up to you. I cannot make you believe me. I think most of you will agree with me that in terms of governance, my company is probably among the best, at least in our industry, if not in much of Hong Kong. At least the institutional bodies do recognize us as the best, at least among the best corporate governance company in the real estate sector.
We are always very open, very transparent about not just what we have done, but also what we may do as we see fit, and the reason why we did something or the reason why we may do something. We have basically delivered every case. I am just surprised that some of you still talk about upping the dividend after I wrote about the rationale why the board has taken the path that it has decided upon.
Everybody like money in his pocket, that I cannot blame anyone for it. On the other hand, as I always say, in most times, your interests and that of mine align. There are also other times when your interests and that of mine may not align. You represent certain investors. We represent all the investors, or at least the general investment public.
We have to be responsible for our staff, our management, our investors, and so forth. Anyway, that is one point. The second point is, as I have been writing about in the last 6 - 2 months, that the market has certainly turned around. I think the recovery has continued. In the foreseeable future, I think the trend will still be in the positive side. As we all know also, the nature of the beast in my business is that these terms are usually for three, four, five years, and you are tied down for a period of time. So it will take a little bit of time for the market recovery to be reflected in our bottom line. Nonetheless, it sooner or later will. I would like to think sooner rather than later.
I won't be too surprised if within the next month or two, the next year or two, you will see some more positive results. The reason is because we know that there's a lot less people moving out, for example, which in the last couple of years was pretty serious. We have less pressure in negative reversion of rents. In fact, I will point to something else that perhaps most of you have not focused on, and that is some of our properties, including Grand Gateway 66 in Shanghai, but also some outside of Shanghai, do have a lot of room for, understand this word properly, tenant improvement. I don't mean to fix up the property. I mean improving of the quality of tenants. As we move higher towards more luxury tenants, rent should be quite favorable. That has always been our strategy.
That has always been the direction for which we have been working on. I think in some of those properties, you will begin to see in the next year or two, positive results in terms of upgrading our shopping centers from, let's say, a four-star to a five-star, or a sub-five-star. I think that should impact our bottom line favorably. So I think that we're pretty sanguine about the future. The near future, the next year, two years, three years. I think it should be a pretty good. Barring any Black Swan events. Otherwise, it should be fine. Philip, you want to add anything?
Yeah. I think just to echo that, I think very few people actually realize the challenge we have been facing since about 6 years ago, I think. The market downturn was never experienced in China since, really, the opening up of China, I think. So that challenge was really huge. So we rode that through. I insist that whatever situation, we still have to win the game. So we actually positioned ourself extremely well, I think. You have seen that we actually kept growing in those 5 or 6 difficult years, which were just behind us. Now I think the time has come for us to really increase the leading length against the other horses in the field, shall we say.
Okay. We now welcome any questions from the floor.
Hi, management. I am Alvin from CLSA, and we have three questions. The first is, what caused the revaluation loss in 2017 in, I think, in Shenyang Forum 66 and Dalian Olympia 66? Is it bottom for these two properties, because we saw similar loss in 2016? The second question is, what is the around HKD 6.7 billion bank deposit in non-current assets? Is it a deposit for land bidding or something else? The last question we want to ask about the actual 2017 CapEx, because your gearing is basically flat. What is your projection for 2018 and 2019 CapEx? Thanks.
Thank you. Revaluation?
Your first question is on the revaluation loss in Mainland. That is mainly related to the mall in Shenyang Forum 66 and Dalian. That reflects the challenges facing both markets in terms of some lease expiry and negative reversions Ronnie Chan talked about earlier on. The HKD 3.7 billion bank deposits with longer than a year, that is our intended decisions to enhance our deposit yield. As you can see, we still have a fair amount of bank deposits on hand, while we are looking for expansion opportunities or land acquisition opportunities, and I think it is a sensible thing to do. Sorry, what is your last question?
The CapEx.
CapEx. The CapEx for 2017 is around HKD 4.5 billion. That's more or less neutralized by the cash generated from our residential sales as well as the disposal of some car parking space. That's why you see the gearing has hardly moved.
How was the projection for 2018 and 2019 please?
Over the next few years, we see that the projected CapEx is about HKD 5 billion each year, while we continue to complete our constructions in Kunming and Wuhan.
I always find the revaluation gain or losses a very amusing thing. Take the following examples. We sold two properties in Hong Kong in the last year, and they were three times the dollar amount of what is on the book. What is on the book was only six months old, or less than six months old. It was three times. Not 30% higher, but three times. Adriel reminded me earlier today that our cap rate in China is still relatively high, 7.25 or something like that for a property like Plaza 66. I don't know what other people use. I did check what other people use. What do you think CapitaLand uses? What do you say? What do they use? A lot lower. Right.
So what justification is there under the sun that a place like Plaza 66 should be several points higher than some of our competitors? Well, they are really not competitors, they are really three, four-star properties. So our ability to generate profit is far better, and the quality of profit is also far better. Yet, if it is 2 points higher, the valuation is totally out of whack. So, to me, it is an art form that is very free.
Ronnie, when you are in the question about the disposal of some commercial properties. There is a question here. Will you continue disposing some commercial properties in Hong Kong?
Philip, if you want to answer that.
To me, if there is an offer so good that I find it berserk to refuse, then I would definitely consider it. But in the-
Such as three times the--
Oh, more than, probably.
Far more.
We have done. This is not the first time we sold something at more than double or three times. There is no urge to dispose of any existing asset at this point in time. Thank you. We have him.
Thanks. Fen Chou from Merrill Lynch. I have a couple of questions. First on Plaza 66, office occupancy was 89% at the end of last year. Is it already the occupancy rate after the completion of the major tenant relocation? Or should we expect the occupancy rates to bounce back to something like 95% level in the first half of this year? Second question on Wuxi, there is 9% space impacted by the construction of office. Should we expect similar impact this year? The last question is, can you share more about the percentage committed for the upcoming mall in Kunming? Are we still targeting the soft opening by the end of this year? Thanks.
Well, the answer to the first question is yes. Plaza 66 will improve. It is because of the tenant reshuffling at this point in time. So I am rather relaxed about that. Number two is Wuxi. The 9% to 10% reduction in space actually applies to the mall because of the building of the second office tower, which is right above the mall. So we have to fend off about 9% to 10% of the mall space, which affects, of course, the mall income.
So if you look at Wuxi performance, the mall performance in Q 2017, if you compare like with like and take away that 10%, basically there is no decline. The last question was about Kunming. I can tell you at this point in time, the confirmed lease is about 32% at this point in time. But these things do not come in a straight line actually.
They will jump once you have a few major deals done. It is now looking quite positive. There is a lot of interest being expressed. But there is one point I want to correct you on, our project completion is end of this year. I mean, Adriel oversees all projects. I will let him elaborate.
Firstly on Wuxi, actually, yes, you should expect to see the continued impact this year because we are not opening the office until next year, 2019. Even in 2019, there will be a little bit of impact because we will be opening later in the year. On Kunming, although we are expecting sort of topping out material completion of construction end of this year. But the opening will not be till next year.
Hi. Summer from UBS. I have three questions. First, we noticed that in 2017 earnings, there are several projects under renovation and there are some other issues like Wuxi project. The rental income from those projects were impacted. Should we expect the biggest impact have already been reflected in 2017 or we would see more this kind of impact in the first half of 2018 as well? The second question, Ronnie mentioned before the positives of the retail sales recovery should be reflected in your bottom in the next one year or two. In your announcement, you mentioned that in several projects you are doing the tenant mix reshuffling right now. What time period do you expect to finish this kind of tenant mix upgrade?
My third question, can you comment on the current occupancy cost in the Shanghai malls and the rest of the malls in tier two cities? Thank you.
Sorry. The first one was on new-
Whether the impact of the 2017 will continue to impact 2018.
Oh, so sorry. For the-
Wuxi, for example.
Wuxi and Grand Gateway. Yes. Grand Gateway, we just started it sort of last year. But that one will be a long one because right now about 25% is cordoned off, is not in business. But as we complete that will come back online. We will start working on the main portion of the mall. What we have been working on is sort of the back portion of the mall. As that renovation moves into the front, the sort of the main portion of the mall, then we expect some impact. Although that will primarily be night works. We expect to be open for business, but some of those modifications are quite major, so we would expect some impact in the next two years.
We are fixing the front part, and that will be also quite material.
Right.
In fact, this middle part may be If I'm wrong, correct me, Adriel. The middle part may not be as impactful because the first part, we have 25%, 30% asset has been the case in the last year or so taken out of the market. Now we're moving. That's finishing. We're moving to the main part of the building, which then as he says, is night work. So at least you can still do business during the day. Later on, we'll move on to the front part. The staircase in the front. That will be another big move and big change. That will then impact again. The conclusion that Adriel said was correct. It will still last for another what, two years? Year and a half to two years. Yeah.
Regarding the question about the occupancy cost, across portfolio will be something around like 18%-24%.
Goldman?
Thanks. Justin Kwok, Goldman Sachs. Maybe two questions, one in China, one in Hong Kong. For the China side we've passed the Party Congress and now heading into the change in the five-year term for the government on the local side. From now on or at least from these two years, do you expect more opportunities for you to do new acquisitions or less so in a way. On the Hong Kong, well, in the past year, you successfully concluded the Amoy Gardens Center. What's the plan for it at the moment? How fast or how big we should expect? Thank you.
First of all, on the mainland situation, I say I don't want to give too rosy a picture, but the reality is we have two or three sources of tailwind. The first one is we have upgraded our own management, and I think it's a much better team today than it was a couple of years back when the trouble in the market began to hit. That's the first tailwind.
The second one is that the luxury retail is definitely recovering. That's the second one. The third one is the one that you mentioned, and that is the 19th Party Congress. I think that it is reasonable to expect some relative peace in the coming, I don't know, one, two, three, five years. If so, then all three of them are actually quite favorable to our business. As long as there's no black swan event, it should be quite good. I'm quite sanguine about the situation in mainland in general.
Regarding the Amoy Gardens industrial building redevelopments?
I wouldn't say we've completed it. I think the word that you used was completed. It's not complete. We own about 84% of it. We've passed the threshold for a compulsory sale. We're definitely looking into what we can do with that. We're still interested in Hong Kong, as you saw with the Kowloon Tong, the more recent tenders. We also put in a bid. Unfortunately, we didn't win. We think it went for something that we weren't willing to pay, so be it. We're still interested in China, and I think after the 19th Party Congress, we should see some things start to pick up again, the pace in China, in mainland.
I think Ronnie mentioned in some other occasion that actually, in China, occasionally there is a major upheaval. But for the last two decades, I think, actually, yeah, three decades, actually, we have relatively, yeah, peace and prosperity. Whatever President Xi said, I don't know how to translate in English, but you can't go wrong.
Very important quotation. You have to learn that. I think, yeah, in general, I think we're still very optimistic going forward. By the way, sorry, just to echo why I'm pushing Adriel to answer all the questions. He's the man in charge of land acquisition and construction. The sooner he finishes the construction, the sooner we'll get income. But I think it is quite true that we have always been looking at Hong Kong, even though we're only willing to pay at the price we are happy to pay. We have to keep the engines warm and keep the team engaged, and I think we're still very much on the ball.
Let me add one thing that you have not asked, but I had volunteered earlier. Let me just complete that train of thought, and that is, I wrote 6 months ago, I think it was, that our dividend will be basically based on rental income. If you were to look at the history throughout the 2000s, we were expecting rising rent. We were expecting sales of Hong Kong properties. So we upped our dividend tremendously. Those 10 years, I suppose that may be one of the reasons why our share price really outperformed the market in the 2000s. Sorry. Both the acceptance of our previous success in mainland China as well as our rising rental and sales of Hong Kong properties.
Moving forward, as I wrote before, dividend level would be more dependent on rental revenue and profit. In fact, we are paying out 106%, I think, this year from the rental income. If our projection is correct, that in the next one, two, three, four years, rental income can grow very healthily, both organic growth as well as new properties.
As you all know, in 2019, we have a lot of new property that will be completed. So in the next two, three, four years, you will see organic growth as well as new properties. As long as those revenue comes through, those increase in revenue come through, and to the extent that it falls to the bottom line, and surely more and more over time will fall to the bottom line, there is no reason why at that point we do not pay out more dividend. What we did not do this year, last year, may be no indication of what may be in the future.
Yes. This is Raymond Cheng from CIMB. This question is for Ronnie, and I understand that you are quite negative on the Hong Kong property price, right? Which is quite contrary versus the many other expert that expect the home price.
Where did you get that impression?
Yeah. Because I just read the news right there saying that you expect some correction on the Hong Kong property price.
Really? When did I say that?
Yeah, just from the news media.
I never said that.
Okay. Anyway. O kay.
Someone want to put words in my mouth.
Anyway, can you share your view on the Hong Kong properties price outlook? Are you expecting some correction, or you are still expecting more price upside from here? My second question is, you also said Chinese developer is quite difficult to get the market share in Hong Kong is because of the strong financial of the Hong Kong developer. Can you share more color with this? Yeah, thanks.
There is more reason than that, but anyway. The first one on the property price. First of all, I never said that I am negative on the Hong Kong residential property prices. To the contrary, an hour ago, I was telling the journalists that I am pretty sanguine about the Hong Kong property prices. I will not bet against it, and the reason is several fold.
Number one, besides Hong Kong citizens' own growth of demand, you always have a lot of mainland Chinese who always want to come and buy properties in Hong Kong. You say, "Hey, they are not allowed to send money down." Hey, they have a lot of money outside already. I can assure you that, right? Go to Harbour City or somewhere and see if you hear Mandarin. The Mandarin is a lot like mine, they are a lot better than mine.
I will not bet against Hong Kong residential prices. The compensating factor, of course, is that the Hong Kong government is doing all its best to supply more land, and you will see more come. Even then, I would not bet against it unless the government suddenly is able to have huge amount of land supply, which is unlikely. It is going to come steadily, but it is not going to be overnight, huge amount.
So I will not bet against Hong Kong residential price. On mainland residential players, I told a story to the journalists an hour ago, that a few months ago, I was in the mainland. I was in Hainan, at the Boao Real Estate Forum. I think I was probably one of the very, very few truly local Hong Kong developers. It is all mainland residential developers there.
Everybody thinks that within five years, Hong Kong's residential real estate market will be controlled, or at least dominated by mainland developers. Because turn the clock back six months, nine months, a lot of land were purchased by mainland developers at huge prices. I told everybody, "I disagree with you guys. I think you guys are totally underestimating the Hong Kong market, and you are also totally underestimating the Hong Kong developers." The Hong Kong market is not as simple as you think.
Frankly, those people think that they know the Hong Kong market. I do not think so, frankly. I will not say that too publicly, but this is quite public, I suppose. Do not underestimate the Hong Kong property market. All those guys who bought, Di Wang, the king of lands, that beat everybody else and make records, high prices, many of them are very worried.
The lucky thing is that I understand that the stronger one of them, not all, but the stronger one of them have been able to raise money from the capital market in the last couple of months, right? You see huge amount of cash raised. That is only limited to the strong players, and oftentimes, the strongest players are not coming to Hong Kong. The ones who come to Hong Kong are not the tier one players usually. The one who do come may not have the ability to raise capital like the stronger peers. Soon after my encounter with my friends in mainland of China, and having that discussion, now, few months later, I think a lot of them are regretting.
If you were to ask the same group of developers today if five years from now, Hong Kong's residential real estate market will be dominated by mainland Chinese, I will be happy to bet a lot of them have changed their mind. Not to mention that the Hong Kong players are a powerful bunch. You have the Sun Hung Kai, the Cheung Kong, the Henderson, the Sino, the Kerry. And so many, they are all Nan Fung. T hese are [Non-English content ]. These guys, they have scars on their back. Financial resources is just one thing. They do have humongous financial resources, and they are lowly geared. Then the experience that they have. Just consider the fact that when those mainland guys were fighting for land in Hong Kong, did any of the Hong Kong people even care to bid?
There were several cases where the Hong Kong people just stay away from the market. Just let you guys muck around and play, and drive up prices. They do not care. The Hong Kong people do not care. You drive up prices, we have our portfolio, and they just go up in price. Then now, I think many of them may be crying. I read an article from the mainland, and they cited what I said, which was not kind at all. I said, in the old days, when somebody wins a piece of land, you say congratulations.
Now, when you win a piece of land, the Chinese saying is it is my condolences. Hey, it happened all within six months. So what gave them the assurance, the confidence that they can dominate the Hong Kong real estate market? I think it is just a bunch of people who do not know, as the Chinese say, how high the sky is and how deep the Earth is. It does not matter. Hong Kong will be fine. Hong Kong prices, I think, if you have good property, buy. We still have time.
Okay. Question from [HDI].
You guys, these are high earning. We still have, what, 13 Blue Blood? 13 Blue Blood, yeah. How many of the five that we sold are to mainland Chinese? What do you think? How many out of the five? One. Yeah. Hong Kong people save a lot of money.
Okay, question from the back. What I understand is that the senior management and the board members has been very proactively in buying shares of the HLP since late last year. What I want to know is, if the senior management and the board members is going to do some more share buyback in coming month?
Senior management. Do not buy. Well, actually, all this is Hang Lung Group buying Hang Lung Properties. Because Hang Lung Group is controlled by one family. Two from that family happen to be on the board. Whenever Hang Lung Group buys a Hang Lung Property, according to accounting rules, and the stock exchange rules, accrues to the major shareholder.
That gives you the impression that the senior management has been buying. Let's put it this way. If the senior management have been selling, that would be news to me. I don't know of that. There's no denying that whenever we see prices are down, Hang Lung Group will buy Hang Lung Properties. At lunchtime, I was told that we were down, what, 4% or something like that? About 5%. 5%? Hey, H.C, what are you sitting here for? Follow the advice.
Okay, question from Citigroup.
Hi.
It's on.
Yeah, you can speak.
It's on.
Yes. Hi, it's Ken from Citi. I just want to follow up on the dividend. You said that you have paid out something like 106% of your recurring profit. Clearly, this is not the policy of other landlords. They're paying 60%, 65%, something like that. Should we expect that you need to be compared with them? Let's say there's a big room for the rental income to catch up before you can raise the dividend. Otherwise, you are paying 100% of your recurring income.
Actually, as I wrote a couple of months ago or a year ago, if you look at the last 10 years. If I remember correctly, something like six or seven years, I think, we pay more than 100% of our rental. Of course, we know that we have property sales profit coming as well. That will run off over time. We only have about what? HKD 4 billion or HKD 5 billion of that remaining. That will run off. On the other hand, we also know that, barring unforeseen circumstances, rents are rising. We know how much we are rising. We have some estimate, and I'd like to think that our estimate should be, in general, correct. As we see rental rises, we may pay out more.
What is your optimal level, let's say, in the long run for this kind of
Use the mic so that people can hear.
What's the optimal level? For this kind of payout ratio in the long run. Let's say, because in the old days, you said that you have development profits.
You have the what?
You have DP, so development profit.
Yeah.
From now on, basically, the development profit you can quantify. Does it mean that you need to go for an optimal payout ratio that is likely to be sustainable for growth?
I wish the world were that static. The world was never static. For example, 2019, we are going to have a lot of new properties hitting the market. Within a year or two, that rental revenue is going to have a pretty good growth, right? In normal circumstances, that's going to happen. As you also know, once you reach a certain threshold, then the top line begin to fall to the bottom line pretty fast. If it's a repeat of the last six years, which was horrific, then it will fall slower. In normal circumstances, a lot of that top line, once you pass a certain threshold, will fall off to the bottom line pretty fast.
I don't know what the next few years are like. I'm pretty comfortable about it, but I may be wrong. If I'm right, then starting in the next year or two, top line is going to grow. Sooner or later, bottom line will grow. I don't like to give you a number. If you ask what is optimal, then I give you a number, oh, gosh, forever. My number will be the norm for this company, at least if not some other people. Certainly we don't want to do that because the world changes. I like Citi, they're the most negative about us, but it's okay.
Can I just supplement some of the points that Ronnie made? I think over the past five to six years, the figures that you've seen, it's not a reflective or true indicator of Hang Lung's income earning potential or profit earning potentials. Let me explain to you why. Over the past five to six years, starting with Hong Kong, we had major renovation work for some of our properties in Mong Kok, Causeway Bay. These are the two very popular shopping districts in Hong Kong, and they account for a fairly big chunk of our rental income in Hong Kong. At the same time, in mainland China, we see the very negative situation in China, starting with the anti-corruptions and affecting the luxury good sales so and so forth. At the same time, we also started our major asset upgrade program with Plaza 66.
Now it's been completed. 2017, we see over 20% income growth. Then followed that by the major renovation at Grand Gateway. These two properties in Shanghai account for almost 40% of the group's total rental income each year. Basically nonstop over the past five to six years, despite of a very difficult market conditions, we have a series of major renovation program going on. These two adverse impact added together really causing the more or less fairly static rental income and profit that you see over the past few years. Okay. Moving forward, like Ronnie said, starting with 2019, we make it very public also, a large number of all these renovation programs, new projects will be completed. These will start generating income.
I do not think you see that often that to a major public developer in a row of five to six years, each year, starting with 2010, we roll out opening a new major commercial properties year after year. All this, it takes time, to go through the gestation period and everything. But at the same time, we experience the market downturn too. I cannot give you the financial projection for the next few years because of the listing rule or whatever. But if you take all what I have said and you do your own sum, then you come to your own conclusions.
Can I just add actually a slightly separate score, but echoing what these two gentlemen have said. It sounds like a double whammy that you actually have a downturn and you have a renovation program. But I think it shows that Hang Lung was actually truly blessed. If you imagine the renovation program was actually done in peak times. You have a major damage to the bottom line.
But I think the properties were at that right age and the right stage for renovation, and we took the opportunity, seeing the downturn and putting the investment. You can see from Plaza 66 results, which I think was astonishing, basically. It is really mind-boggling to see the kind of growth and the demand by our tenants at this point in time. A second point Ronnie Chan mentioned is a threshold.
Now, it is actually a very interesting industry in the sense that if you open the doors of mall, you have to pay overhead. Utilities, the staff, the salaries, and all that. Say that is HKD 50 minimum cost once you open the doors every day. If you make HKD 60, you make HKD 10. Net profit. But if the revenue grows to HKD 100, your HKD 50 cost will not grow correspondingly.
So you actually make HKD 50 instead of just the HKD 10 . That is actually very amazing. We do not have that in bad times. We do not have that flexibility. While running airline, you can just say stop that off service. Park the aircraft. You just do not have that flexibility. You have to turn the lights on and get the staff back to work as usual. But you only make HKD 60. When the times are good, then you have the huge jump, exponential jump in the income and profit.
Okay. Given our income half of RMB. There is a question about, ask Ronnie, what is our view on the RMB going forward? And what will be our treasury policy in terms of the RMB cash holding for this company?
The first half I will answer, the second half I leave to H.C. The first half is, I do not know. Where is the RMB going? How the hell do I know, right? If I know, I will be a very wealthy man, right? Yeah.
Riding on the first answer, because we do not know, so we would not speculate on which way that the RMB would go. But simply, our treasury hedging policy is like this. We try to borrow RMB onshore to finance our RMB construction payments. But the market is heavily regulated. You cannot borrow 100%. For the rest of that, then we keep some RMB deposit in Hong Kong to achieve that hedging purpose.
Okay. Question from Nomura.
This is George Kuo from Nomura. We heard loud and clear that from 2019 onwards, rental income would be on a magnificent uptrend. But I think a certain group of investors, actually including myself, are still concerned about how the conviction of rental income recovery or rebound in the next 12 months, maybe in the upcoming summer, and then 12 months from now. We heard from you. Plaza 66, this is obvious. The fractional vacancies should be all fixed or largely fixed. Wuxi and Tianjin, where we saw rental decline, but operationally, occupancy have gone up, retail sales gone up. What's your projection or guidance for the rental income in the next six months for these two?
We also heard that Grand Gateway, the major disruption in terms of income is actually largely reflected because the next phase, even though it's going to move to a major part of a shopping mall, it's going to be mainly a night work. Can we project at least a moderate rental income growth when we go into first half 2018, especially when we're going to have a tailwind from RMB appreciation, where the whole bunch of question is all tied to how are we going to project the dividend growth? Because, again, we read it very carefully from the chairman's statement that dividend is going to be tied to recurring income and hence all these bunch of questions about recurring income. Thank you.
What about dividend growth prospect? As simple as that, right?
6- 12 months.
Give us the number.
Since it is such a tough question, I will leave it to Philip.
I can only tell you there will be eight races on Wednesday at Happy Valley. Give me a number. Number two is, actually, I do not do any homework. I just read Nomura's report. They seem to accurately estimate and forecast our numbers extremely well.
Can you repeat the answer?
I am actually not expecting too much in the meanwhile, because I am putting a much bigger hope beyond 2019. But in the meanwhile, for 2018, should we expect some sort of mid-single digit type of rental income growth?
No, no.
Because by the it will already translate into more than HKD 0.01 , but HKD 0.02-HKD 0.0 3 cents of dividend increase.
Well, there are two separate issues. First of all, the team, we will have to maximize and optimize the revenue income no matter what. And our Director of Leasing, Norman Chan, used to have a full head of hair. He has now no hair after these few years. Anyway, what I told him, obviously, is much more ambitious than what he told me.
Maybe just to try to give a little bit of color. I think in retail, we see a little bit of a return, in particular in luxury in the first-tier cities. It always is a little bit lagging in second-tier cities and for non-luxury. In general, we're hoping that everything else will follow first-tier luxury. But we're not 100% sure that will happen at this point. The retailers are still a little bit nervous because it's mixed. Some retailers are up, some retailers are down. So it's not 100% clear yet in the crystal ball which way it's going to go. We're hopeful. We're doing everything we can to push the retailers. But for them, there is still a sense that it's not 100% clear yet.
Yeah. I think we are very clear about the trend. Please get right. The direction I think is very clear. Everybody sees spring is coming back. But obviously, in our industry, there's a time gap, and you don't have the rents increased by tomorrow. As I often say, how do you say "Lap Chun" in English? Start of spring. By the Chinese lunar calendar, Lap Chun, the start of spring, is actually this Sunday. We're now in the coldest day of the year. Only 8 degrees, and Ken is wearing his down jacket. So you can see actually, now even though spring is coming, it's not getting warm immediately.
In fact, you notice that there are some numbers regarding Center 66. You will see that actually it's turning around. If you strip out all those areas that taken out for OT2 construction, actually flat rather than a downward trend. This is the first time you see that actually we're pretty confident that we will expect a positive growth for Center 66 more in the coming year. So this is actually a pretty good turnaround story. Look at the retail sales number across the board. Actually, every project are rising in terms of retail sales. Likewise for the occupancy rate as well. Half-on-half, you will see that actually all numbers are actually going up.
The foot traffic as well is also up.
Yeah
In all of the malls. Exactly. Because all these are up, we should expect the retailers to be feeling good as well. But the reality is that the retailers across China and across sectors are not fully on board yet. I mean, for example, the luxury brands are not yet expanding rapidly again. A lot of them are still. Some of them are still closing stores. They still need to sort of rationalize. But some of them are slowly feeling more and more confident.
Okay. Morgan Stanley.
Thank you. Hildy from Morgan Stanley. In fact, slightly allow me to ask for some outlook of two properties. One is Forum 66 and then one is on Dalian. We understand on half-on-half, second half 2017, the rental income, even in RMB terms for these two assets seems down. And we also see that retail sales seems improving. We want to understand what are challenge these two malls were facing, and do you expect that the outlook in 2018 will be better? So it will be stabilized and maybe upturn coming future? Thank you.
I spend a fair bit of time in Shenyang because we have construction there, as well as the two properties. And I still think that the situation on the ground there is improving. Foot traffic and sales are both improving. As I mentioned at the half year, we have a new general manager there as of late January this year. She just joined us. And I think management have to give her some time to do what needs to be done, which means rationalizing the team, the tenants, and getting everything from marketing to everything else right. And that's not one day's work. I think it is now in a much better position and a much better condition than it was just 12 months ago. So I'm actually feeling quite positive.
But of course, the retail sales will hopefully follow, and then after that, then the rentals should be able to follow as well. I am cautious, but confident in Forum because I think we have the right GM there. Dalian, the numbers look very good because we are on a very low base, but it is a huge mall, and we still have phase II, which is about 13% of that mall, which is not yet open. So we are hoping that we can do a lot more with that mall this year and next. Everything from foot traffic to sales, we are hitting records. So we need to continue to build that base.
You can see from our figures, actually, Forum 66, despite the difficulties mentioned in the past, the year half-on-half shortfall has actually narrowed quite substantially. The retail sales actually has shown an increase for since several years back, I think.
Can I clarify one thing? Maybe I heard Adriel wrongly. Our general manager, which we think is quite good, the new one in Forum 66, has been there not since this January, but last January. She has been with us for now a year. She is really making changes that are very positive. If I also heard the question correctly, Olympia 66, the retail sales year on year has grown quite a bit. It did not decrease.
In fact, compared to last year, it almost doubled in retail sales, 99%. So retail sales is up, occupancy rate is up. So it is moving in the right direction. Rental revenue has not been up. We still have legacy problems. If people moved out a year ago or six months ago, you still have to find the right tenant to fill that. That is congruent with your overall strategy for that floor of that shopping center and that kind of stuff.
A question here regarding the office contribution. Since office account for somewhat like 25% of our mainland income, would you like to comment on the prospect of the office market, particularly for outside of Shanghai?
The offices are doing quite well. I dare say it sort of beat our internal expectations. We are building the second office tower in Wuxi right now. The two towers in Kunming and Wuhan are also coming along very nicely, very quickly. We expect that those will also do reasonably well. We are still interested in offices outside of Shanghai. If we have opportunity to do more, then we would be interested to do so.
There was an earlier question about Shanghai office, right?
Yeah.
We just had a big tenant move out. I think we already filled it. Anyway, while they move out, there is a couple of months of tenant improvement and so forth that needs to be done. Hence, we were down a few percent in rent last year for Plaza 66. It has been filled. In fact, quality of tenant has been improved. Am I correct? Okay.
Also one quick note. In Shanghai, the Grade A office competition is quite fierce. You have all the international players building these really great office towers in Shanghai. So the Grade A office market is quite commoditized there. You can move from office to office very easily. Whereas in second-tier cities, oftentimes you have a lot of local developers who are building so-called Grade A offices. Frankly, that's just not comparable to what we build. The multinationals will see that when they enter those cities. That's why in the second-tier cities, actually, we end up having quite a strong and very good market position, just because there's very little competition for true Grade A.
Of course, that phrase you used about multinational corporations, a lot of mainland Chinese corporations these days are multinational. Ping An Life Insurance, Bank of China.
Yeah.
All these are our office tenants. I don't know how to consider them, as mainland tenants or international tenants. They are both.
Okay. In view of the time, we can still allow one more question. You again? Not on dividend, please.
Kunming Spring City 66 out of 32% being pre-leased. How is the mix and position? Thank you.
Thank you. It's actually a very good mix. We have some of the anchors we're very close to. We do have some luxury in there that we're very confident about. It's really the two categories that you need to get a mall started, and that will bring in the rest of the tenants. We're quite confident at this point about the coming projects.
Okay. That concludes the presentation today. Thank you very much. Thank you for coming.