Good afternoon to everybody, and welcome to Hang Lung Group and Hang Lung Properties H2 2015 results presentation. It is my pleasure to introduce to you the speakers for today. Mr. Ronnie Chan, Chairman of Hang Lung Group and Hang Lung Properties. Mr. Philip Chen, Managing Director of both companies, and Mr. H.C. Ho, Executive Director. I will give the floor to Ronnie.
Okay. Thank you, sir.
Ronnie, you are now on webcast, so everybody will-
I know. I am sorry.
That's where they call it Hong Kong.
Okay. I should shop. There's a lot of wonderful, beautiful ladies here, not me. Anyway, I think I'll preempt one of your questions. Why are you lowering your dividend? I think that is just a way to lead into the discussion for today. Obviously, cash is not an issue. We have how many? What, HKD 30 billion of cash or whatever. HKD 3 billion of cash and HKD 0.01 cent difference is only about HKD 44 million. It's really the Board's decision that reflect our view of the market. For those of you who don't read Chinese or don't get on the Chinese internet, for some unknown reason, my interim letter to shareholders went viral in mainland China. "Han Dong Lun," the long winter theory, is no theory, has been widely publicized. We truly don't see an end to the present malaise in the market.
We just want to have a signal perhaps that management is not that bullish about the near-term future. I think in the longer term, I have not heard from any of our Board members, and many of them are very knowledgeable about mainland China, don't believe that China will still be the fastest big economy in the world, and hence, our opportunity. I would also add that I was chairing the China session as always at the Asian Financial Forum, a week ago. When you speak to people who are in the know what can Beijing do to pull the economy out of this present lull? I think everybody agreed that consumer private consumption must be the, as the Chinese say, the key horse that drives the carriage.
So in the longer term, we are pretty comfortable about China, but in the immediate term, we really don't see any possible impetus that can pull the economy out of the present situation, and hence, the HKD 0.01 drop in dividend. The last time we have done that was 1999, which was 17 years ago, when, as we all know, the Asia financial crisis was really tough. So, at least for Hang Lung Properties, Hang Lung Group had a slight reduction in dividend in 2001 as well during the, what do you call it? The internet bubble, right? So even that is 15 years ago. We don't take this decision lightly. We feel that it is really a signal to our shareholders and potential shareholders that we are braced for a prolonged period of tough times. Philip, you want to add something?
All the salient points are actually in the announcements and the release we have put out. I think you've highlighted a key point which preempts a lot of questions, as you said. Perhaps we can invite questions.
Okay. We welcome questions. Just raise your hand and let us know your organization. UBS?
Hi. Eugene from UBS. Just a question on, maybe for H.C. I see there was a provision made for two shopping malls, of HKD 266 million, mainly Center 66 and Forum 66. Could you share with us what's the basis of having a valuation loss, and do you see there's potential spreading out to other shopping malls?
The valuation loss basically reflect the rental performance of both malls, and that's come up with the independent evaluators samples. They believe that the valuation should reflect the reality of the rental situations. At this stage, they don't see the risk of that spreading to other malls based on what they saw when they were doing the December 2015 valuations.
Can you tell us the rental for the shopping mall?
Can you speak up to the mic? The webcast audience can-
Do you mind showing us the number for the two shopping malls, excluding the office for the rental trends? Because if you look at the rental that you put out, it is actually still flat or a slight increase.
The rental turnover for Shenyang Forum 66 in 2015, it dropped 16% compared to a year ago. For Wuxi Center 66, it dropped by a quarter.
Thanks. Justin Kwok, Goldman Sachs. Maybe just a follow-up on that. I just want to get a sense on the impact from the currency translation to your financials reported in this round. In your investment properties in China, if you exclude the translation impact, how did the number move and did the valuers move the assumption as well? If you look at the P&L as well, China's revenue in the second half 2015 seems to have gone down a bit. If we exclude the currency impact, how would that be? That is the first question.
As you may be aware that the translation of the P&L is different from the translation of the balance sheet item at the year-end. The translation of the P&L item is based on the monthly weighted average exchange rate between renminbi and Hong Kong. You may recall that during the first half of last year, the monthly weighted average exchange rate of renminbi is fairly stable. It is only during the second half that the depreciations kicked in. If you put the overall monthly weighted average for the full year, the renminbi only dropped by about 1.3%, 1.4% against Hong Kong dollars. If you apply that to our rental income in mainland China, that means that the renminbi denominated rental turnover dropped by about 1.3%, 1.4%. But rental coming out of mainland China only accounts for about 55% of the group's total.
If you consolidate everything up, the overall impact of currency on our rental turnover and bottom line is only about 0.7%, 0.8% for the group's consolidated total. The other question that you raised is about the translation of our assets in China. All the properties and cash balance net of the bank balance, bank borrowings, and other liabilities, that is a net asset side. Whenever you decided to invest in any overseas countries, inevitably, you have exposure to that country's currencies. The translation of those figures is based on the year-end rate on the 31st December , at that single point of time. The exchange rate between December 31st of 2014 and 2015 has actually dropped by 5.5%, 5.6%. That is why you see a fairly sizable translation loss.
Bear in mind, over the past five years, a lot of gain actually comes through the exchange reserves. So this time we have the translations loss also going through the exchange reserves. Okay? That is a book figure of another kind of mark-to-market. The other question you may want to ask, but I may as well talk about, which is the so-called the mark-to-market loss of our cross-currency swap contracts. We have two swap contracts, back-to-back cover of our two bond issues, $ 500 million each. Based on the mark-to-market value of these two contracts at the end of the year, last year, we have a mark-to-market loss of HKD 101 million. If you look at the mark-to-market value of this contract about two days ago, it is HKD 112 million gain. That tells you how volatile the currency market lately.
Not just the currency market, but the stock prices and all other things. But the key thing is our swap contracts is basically to cover our exchange risk. We lock in Hong Kong and U.S. dollars exchange rate 7.75 for future interest and principal repayment. So we eliminate exchange volatility risk completely. And as a side product, at the same time, we managed to enter into those contracts at an interest rate below the coupon. So it is interest saving as well. So this kind of mark-to-market thing, is accounting requirements. Now, if I could change the balance sheet date to two days ago, then you would see a mark-to-market gain of HKD 112, but that is not the reason of doing it.
Okay, thank you.
Jeffrey? Oh, sorry. Citi.
Ken Yeung from Citigroup. So I want to check about some individual shopping mall performance, because you just mentioned Forum 66 down 16% and Center 66 down 25%. Are you seeing how long that kind of things should normalize? Because we do see that you do a quite great job on Palace 66 on the rentals and Parc 66. So for this particularly worse-performing shopping mall, are we seeing some turnaround in, let us say, how long for that? And the second question is on Olympia 66. It seems to me that the occupancy and the performance is. Previously, you mentioned that you will be something like, the committed occupancy is below what you previously mentioned. Is it because Dalian operating environment is especially tough?
I think the two malls that are obviously under more challenge and pressure are the two just mentioned, Forum and Center. Forum 66, obviously in Shenyang, as you know, actually, we are doing some reforms, but I would hesitate to tell you when I think the market will pick up. Had I known, I would probably not be sitting here. I would be in Bahamas enjoying my life, actually. But honestly, I wish we could stabilize quite soon. But as you know, the challenge is quite obvious in Shenyang at this point in time. A lot of things have been done, and some of them are showing some good signs, but I won't put a date and say, "This will stabilize and turn around that time." Center, I think we actually have seen this situation in 2015.
Again, a lot of things have been done recently, and hopefully we will see something positive. But I don't think the external environment will change drastically, and I do not think the current situation will suddenly improve overnight. I'll just be cautious about the whole situation at this point in time. Obviously, the other cities, you see different performances amongst other cities for various reasons. I'd be happy to go through every one of them with you, but it'll probably take too long a time here. Suffice to say that actually some of the cities we have done a lot of work on, and they're showing very good results. Whatever you do, however, you can't really counter the headwind, the very severe headwind that we're facing at this point in time. We might be doing relatively better than some other people and doing, against the headwind, still satisfactorily.
Yet, this is far from ideal situation, obviously, given the headwind situation. As for Dalian, the decision was made to soft open end of last year. But as you know, this is one of the largest, in fact, the largest mall in the Hang Lung portfolio. This is about 2.4 million square feet, so really huge. Several times Plaza 66, and probably about three times larger than the swimming pavilion during the 2008 Beijing Olympics. So you can imagine the size there. So to achieve a certain commitment percentage, it is already a very remarkable achievement, I think, with the kind of tenants we would like to accept and at the way it was going at this point in time.
However, obviously, there are other kinds of challenges, particularly given China's, as you know situation, where perhaps, let's say the fire services department, the other utility supply department, and all those actually can pose interesting challenges, which we have to overcome in due course. Given that situation, that's why we still call it a soft opening at this point in time. The percentage of shops open and which the one figure you mentioned, Ken, I think is something that we know of. We actually plan not a graduate immediate open of all the shops, but a gradual swing up when we gradually move closer to the opening date of middle of next year.
Let me look at it from a slightly different angle. You asked about Center 66 and Forum 66. Look at the previous two centers that you also alluded to.
Palace 66 had to be adjusted in the first term, which we did. It turned around from a very difficult situation to a very positive situation. That was because the environment in which we were operating in was basically an okay environment. It wasn't crazily good, neither was it bad. We were able to guide that ship, so to speak, to a very healthy situation. Parc 66, a year later, went through the same thing. It's bigger, so it has different challenges, but we were doing well. Now it is a little over four years into it. You can see that that thing is really turning around as well. The problem is, towards the end of the first term, the market became soft.
Then it became very soft. We are trying to shepherd the property into a better condition at a time that the headwind began. We squeaked by, I would say. Parc 66 is now certainly much better than what it was, say, two years ago. Then Forum 66 and Center 66. Forum is three years old and Center is two years old. We have the double whammy of having to usher the property, to shepherd the property through the initial teething problems.
Right in the middle of it, the typhoon came. Right. That's why you see the - 16 degrees, - 25 degrees, that kind of stuff. Then you will see vacancy rate rising. Without those, I think they would just follow the normal course of its predecessors of turning around at the second term. I think Forum 66, it just, to use a Chinese saying,[Non-English content] "born at the wrong time." So be it. It would just take longer. As I always tell people, that which determines the success of a shopping center is first and foremost our hardware. There's nothing wrong with the hardware. Hardware is beautiful. The software we are fixing, and then the headwind came. We just have to wait a little longer. For shareholders, you will see numbers that, ooh, I didn't see it that bad in Palace and Parc.
Well, it wasn't that bad because it's no headwind. So be it. There's always ups and downs. I told my younger colleagues in the company, I said, "It's very good for you guys that you see, as a Cantonese saying, "To see the ghost." It's very good in your management development career to weather these kind of things. We've seen it in 1973, 1974. We saw it in 1987. We saw it in 1997, 1998. We saw it in 2000. We saw it in 2008, 2009. We've been around. You know that when the market is down, there's just not a whole lot you can do to the headwind, but you just start doing other things. I'll just cite you one example. I think the whole company, I alluded to this six months ago with you all. The whole company is undergoing a reorientation, you may even say.
By that, I mean, I think I might have used this phrase last time. We have always been a B2B company. Our customer is Prada and Louis Vuitton and Chanel and Hermès, right? But we are evolving into a B2C company as well. We are not giving up our B2B. We are a B2B. Our mindset has also to evolve to become a B2C company, because the way technology is changing retail in some very fundamental ways. Okay, this is the tough time. Let's use that time. Since we have no financial pressure, let's use that time to really delve into the, so to speak, new model of what Hang Lung ought to be moving forward. Now, mind you may say that some people will say, ah. Other people will sooner or later follow suit. Yes and no. I am not so sure.
A lot of people said that they follow the Hang Lung model. There are quite a few mainland commercial developers in the past have publicly said that they would follow what Hang Lung is doing. But eventually, were they successful? They were not successful. The main reason, frankly, they are not successful is because they got the wrong hardware. It is just like asking Ronnie Chan to go play in the NBA. You know the NBA? The National Basketball Association. Ronnie Chan will never play in the NBA because of the wrong hardware. It is not because of the software, maybe. Right. I think that we have the best hardware. Other people, not everybody else, has the same hardware. Even if you give them the software, without the hardware, they still cannot do what we can do.
What we want to do at Hang Lung is that while we already have the hardware, we want to change the software. Just like in your iPhone, from time to time, you need to change your software. I get a notice, "Hey, something new. Would you like it?" Push the certain button, right? From time to time, you have to retool. Sometimes you have to upgrade. Or even fundamentally, not change, but add another dimension to your company. That is what we are doing.
Nobody is happy when the market is down. It does not feel good. But we have learned to not feel bad because we have no financial pressure, and we just take advantage of this time and do the right thing. When the market finally recovers, and recover it will, it just may take a little longer, we will be an even better company at that stage. Then again, to preempt perhaps another question of yours. You remember that in 2009, 2010, I wrote that the market problem at that time was rather a V-shaped one. It went down very sharply, right? Then it recovered rather quickly. I wrote a couple of years ago that I think the present problem, I did not write this in 2010, I think I probably wrote this in 2012 or something like that.
That the problem that we're facing today, while not as deep as 2009, 2008, neither, in my estimation, will it recover as fast. That's why we're bracing for a longer winter.
I was trying to manage Ken's expectation because I think whatever I say, he seems to be quite skeptical of what I'm going to say anyway. Actually, I don't want to be sounding too optimistic. The point really, I have to be cautious. As I said, the determining factor is a major headwind. But if you look at actually what Ronnie just mentioned about Palace 66, it has actually record some growth in 2015, albeit modest. But as you all know, five years ago, six years ago, when we started, it was not such a pleasant story. But a lot of work has been done, and the team actually is quite happy there. We have actually the first even Halloween party in the northeast of China. People have not in that part of the world yet. But this is what we have introduced.
The tenant occupancy rate is over 90% in Palace 66 in Shenyang, and Parc 66 occupancy is about 90% at this point in time. Revenue actually holding strong. Actually they're doing pretty well. The point is, of course, if there is no headwind, the efforts we have put in will yield even more remarkable results. So I'm trying to be cautious about what we have been doing. But I appreciate really the team's very hard work and their contribution are very much recognized. Although I keep telling them, "You got to work harder.
Thank you.
Thank you. This is Wenh an from Merrill Lynch. I have three questions. The first one is still about the currency issues. So far, the company's major cash exposure is in RMB, and the major borrowing is in Hong Kong dollar and U.S. dollar. This kind of mismatch. Will the company, under the current background, make any plan to adjust this kind of mismatch? For example, maybe use the onshore assets to issue some domestic bond. The onshore interest rate is going down. The second question is about maybe the share price. The share price performance is not so ideal so far. Given current valuation and company's outlook, will company consider share repurchase or maybe the Chairman of Hang Lung Group will increase their holdings right after the result. The third question is about Hong Kong sales.
Last year, Hong Kong sales is pretty lower than 2014's. Given the outlook in Hong Kong residential market for this year, 2016 and onwards, will company sell even slower or the other way around? Thank you.
I take the first questions.
I take the second maybe. Philip take the third.
Your so-called currency mismatch, I answered it earlier on, particularly on the U.S. dollar side. We issue U.S. dollar bonds. We have the swap contract covering it. Although at the end, we have a mark-to-market loss. But as I say, it could change to mark-to-market gain sometime in future, I don't know. But the key is risk management. We manage the foreign exchange exposure on U.S. dollar debts through the swap contracts. On the renminbi side, it's two part of the currency exposure. Firstly, it's the renminbi denominated net assets that we have in mainland China. We know that one way of reducing the net asset exposure is try to borrow locally as much as possible. But you may also be aware that to what extent that foreign developers can borrow onshore renminbi is very much controlled by the mainland authorities, okay?
Your suggestion about issuing renminbi bonds locally, that our treasury has been looking at it for many, many months. We also are aware that, in fact, interestingly, over a year ago, if you talk about issuing renminbi bonds, the 10-year rate would be about 5%-6%. The latest renminbi 10 years bond that you issue in mainland China is actually dropped to somewhere four point something, which is basically same as U.S. dollar bonds. This is an area that we've been looking at it closely. But there are also certain regulatory conditions that we have to overcome. We've been working on it, and we didn't say it because we haven't got to the stage of signing on the dotted line. I have not even presented to our Board because it's still early days. There's certain things that we need to iron out ourselves.
But raising renminbi local finance to reducing or slowing the growth of our net asset, renminbi net assets in China, is the way to go, right? It's common wisdom. When you invest in a foreign country, you try to borrow local currency as much as possible. But bear in mind China, the currency is not freely convertible yet, so there are many constraints and control in place. The other part of the renminbi exposure, which is the deposit we hold in Hong Kong. The main purpose of that is to meet our future funding needs in China, the construction payments. Again, there's no free movement of capital between Hong Kong and China, outside or inside China. Every time when you need to inject funds into China, you need to get approval from the local authority before you can move funds across.
Even if we have to pay renminbi construction payments in mainland China, you got to make application, they approve it, you inject the funds from Hong Kong to mainland to pay for it. So the amount of renminbi deposit we have in Hong Kong simply reflect our future funding needs. But that could also change over time as we complete the constructions of, say, Dalian, or when our desire of certain malls becoming more definitive. We know the future budget construction costs in a more definitive manner. Or the market conditions will suggest us to review our business plans and so forth. That would also change. But the simple point on that one is we hold onto those because of our future funding needs.
If you look at our financial statement, you will see that we have capital commitments of just under HKD 40 billion worth equivalent of the renminbi future commitments. If we compare with the amount of renminbi deposit we hold, it is only part of the total commitment. How long would that take us for us to complete the construction of this HKD 40 billion commitments? Is that three years, five years, 10 years, 15 or 20 years? Under the current market situation, there is no real need for us to hurry on building all this out. Nor is there a real need for us to stop construction of everything. This is an ongoing exercise that we have internally. We do all kind of testings, like stress tests, modeling.
We together with the business people, commercial people, and review our ongoing funding needs, then we will just adjust our renminbi deposit balance accordingly.
I will again bring a different angle to answer your question. I am really proud of the Board that we have. Yesterday in the Audit Committee meeting, today in the Board meeting. We have really some of the world's best experts on our Board. Talk about the interest rate, the RMB and all that stuff. We have Anita Fung, former CEO of HSBC.
Correct.
Whose background was in the treasury, as we all know, is really one of the most knowledgeable. Then we have one of the most top economists Pak Wai- Professor Liu from Chinese U, right? So you have the macro analysis, you have the capital market analysis, then we have Dominic Ho, who is a Former Chairman of KPMG in China, and has been living in China since 1984. 1983, 1984. The discussion is really, really of a higher caliber than any of the conferences I have ever chaired. Many of you know that I chair many of these sessions, conferences, and this and that. Let me tell you, these guys on my Board, on our Board, really the discussion. They may not want to say it publicly, but it is really world-class stuff.
For example, this morning, Professor Liu summarized his view about the Chinese economy in the short and intermediate term. I think it's world-class. I've never seen anybody that really summarize it in such a good, succinct way. We also, oftentimes the Board invite outsiders to address us. In the last six months, we invited two of China's top, top people, former government officials, to Hong Kong to just meet with our Board for many hours, each of them. That really give management a great, a broader view of the situation, as well as many pitfalls and potential this and that. I think after much discussion, then management craft a path forward. Then we produce a paper, go back to the Board and seek their confirmation and so on and so forth. It's really a very rigorous process.
Doesn't mean that we'll always get it right. As I said this morning, I said, "Wow, if we are smarter, we would have six months ago sold our RMB." Then one of them said, "But nobody in the world did that." Okay, fine. To your second question about buyback. We always buyback. Hang Lung Group always buyback Hang Lung Properties whenever you guys don't want it. C.F. doesn't want me to say a lot of things, that's why I turn my back on him so I don't have to look at him. Hey, we buyback. We couldn't buyback until today. Right? The question is how fast, right? Should we wait? We're not going to tell you. But once you cross 1 percentage point, we have to report it. So yeah.
In principle, that's what we do whenever there's a bear market and that's why I love the bear market. Really, the Chinese say, "When the wind blows, even a pig can fly." So who the hell are we? We are just one among many, right? But when the water recedes, then to use a Western saying, which is a little bit cleaner, the men and the boys will be separated, right? Hopefully we prepare ourselves well for the next growth phase. Most of you probably don't know, I studied botany. Oh, you guys don't like botany, you like wine. The grapes need a severe winter, a period of hard winter in order for the wine to be good, right? Same thing. You need a tough bear market for a company to emerge stronger and better. The others who don't do that's their problem.
Many people die in the winter, right? So, I'm invigorated. I went with my family to the Lapland in Finland, Northern Finland, way within the Arctic Circle. Man, I was invigorated. Right? So, hey, winter is really wonderful. I love it. - 25 degrees. Great.
Okay. The question about Hong Kong property sales, H.C.?
We capitalized on the window back in 2014 and offloaded almost HKD 10 billion worth of inventory. At the moment, we only have 680 odd units left, including the 18 houses in Blue Pool Road. Okay. If there is another market window this year, why not? But after all, we only have 680 odd units left. Months ago, someone offered to buy one of the remaining two duplex units at The HarbourSide. You can check what is the list price on that one from the website. I mean, we published that. It is over, what? Yeah. HKD 100 million worth. That guy tried to bargain for a few million dollars discount. I said, "No, we only got two units left." So I mean, we just want to monetize our assets or inventory to maximize our return.
I do not see any hurry, but if there is a good market window, we will consider it.
There is question from the webcast. The company reported a net debt position just now. Would we consider, given the rental market outlook in China is not that favorable, will the company scale down its CapEx for FY 2016? Will we slow down the construction? The question is.
Let's put it this way, we would not deliberately hurry it up. Sometimes the slowing down is not necessarily voluntary. We are having heck of a problem in some of those places with the government, with fire department, with the utilities. I mean, problems that we can never imagine or dream of. It's possible in the mainland of China. That said, you say, "Hey, Ronnie, in the last 20 years you have seen a lot of that." That's true. Eventually they all resolve themselves. Well, they don't all resolve themselves. It get resolved between us and the government. Eventually, the problem will be resolved. We are facing, again, a lot of these. No, not a lot, but a few of these issues. Some of which, however, is very tough. It may not be voluntarily slowing down. We may have no choice.
We're still aiming at 2018 for the opening of Kunming. Hey, one issue that the government introduces, not according to the books by the way, just a matter of perhaps the expediency that they need it for something, some reason, political or otherwise. Then we became caught by it. If it delay by three months, it may then turn out to be January of the next year. As far as you guys are concerned, oh, it's one-year delay because it was 2018, 2019. Is it deliberate? Not necessarily. We like to have it ready by 2018, whether we open it or not, what the market condition will be at that time, we'll judge when the time comes, but we always like to be ready for it. After all, that is still, two and a half years, yeah, three years ago, actually.
Almost three years ago. God knows what will happen three years down the road. Deliberately, non-deliberately. Deliberately, we're not purposely hurrying things. Involuntarily, we may have to postpone things in certain cases.
Thank you.
When somebody asks about Olympia 66 in Dalian, we have some challenges there. Even whatever the government I always tell my colleagues, "Don't ever trust the banks." One of our Directors this morning could not join except by phone. So he text me a message and said, "Ronnie, keep more cash. Don't ever trust the banks." So I text him back, I said, "Yeah, I just spoke to a young colleague of mine 30 minutes ago." That's exact word I said to him. "Don't trust the banks." So now I found out that I shouldn't say now I found out. I found out a while ago that, with banks, you sign on the dotted line that they promise to give you money. When your time comes, there's no money, right? It's possible with banks. In China, with government.
The government said, "Yes, you can do that. Go right ahead." So we go ahead and do it, then 3 months later, they come back and say, "No, you cannot do it." Sorry for my Cantonese. They dare to do that. They dare to do that. Well, they dare to do that. So anyway.
JP Morgan.
I just want to get some more information on the asset enhancement in the Shanghai malls that the Grand Gateway Mall would have the asset enhancement later this year. So, can you tell us some of the detailed plans? Like what's the percentage of space that would be affected, and how it would be carried out, and the expected CapEx on the asset enhancement? Thank you.
I'll leave to H.C., I think.
The plan was actually very simple. The logic was very simple. Both malls are roughly only 15 years old. Time for an upgrade. It is quite right too, given the external environment and all that, and the demand in Shanghai. Both are still extremely popular malls. We decided to actually do the Plaza 66 first. The office towers are more or less in place. I think many floors have been already upgraded, and the lobby is being done. I'm going to see it next week, see the progress next week. The mall is being done, and by Chinese New Year, actually, some of the floors will be new floor will review. The progress there is actually very satisfactory. The tenants are really welcoming it.
The plan was really not to have two malls of both Grand Gateway and Plaza 66 being upgraded at the same time. Minimize overlap. You got to do it very carefully, too, because you don't want to drag it on for too long because you got to capture this window of the headwind and downturn and do it at this point in time. Grand Gateway, the plan is to actually do it, to start the physical work by the end of this year. The final designs have more or less been approved with minor touching up and fine-tuning. It will touch nearly every aspect of the mall.
From the entrance, from the junction to the main lobby, to the atrium, to the lifts, to the way the mall is laid out, and to connect to the building right next to the mall, which is at the moment nicknamed the Annex. I don't think it should be called Annex. It should be part of the mall. All that will be upgraded, and it will offer extremely nice new look by the time it's finished.
An immediate question from the webcast is, would there be any rental disruption going forward because of the renovation?
The indicative budget for renovating Plaza 66 and Grand Gateway is about HKD 1.3 billion. That figure could also change because the final design of Grand Gateway is still going on. Eventually may decide to do a little bit more here, a little bit less there, but at least that is a ballpark figure. The rental disruption happened at Plaza 66 basement level of the mall. It would be between 6%-8% of its annual rental income this year. For Grand Gateway, it is also within the ballpark figure, but it will stretch over 24 months.
To 30 months, because the whole renovation, it takes that period of time at Grand Gateway.
Payback, it will be around four years. Three to four years.
Okay. Sheila, anything?
Ronnie, having seen that you haven't cut dividend in 2003 and haven't cut. You haven't cut dividend in 2003 and 2008, and this is the first time ever, as you said, in 17 years. Is that a signaling, which then afterward, would you keep to your tradition of keeping your dividend flat, or is it going to track how your overall business is going to do? That's first question. The second question is that the gross margin of your China rental business has come down a bit last year due to various reasons. What's the outlook for that operating margin going forward next year? Thank you.
All right. I'll answer the first one, and then I'll let my colleague answer the second one. There's no change in dividend policy. We never promised that it will never be cut, nor is the intention to remain flat. I'd love to increase them. Why not? But it has to be making the money, number one, and number two, the environment need to be cooperative. It's just not that today. So you're right, it is symbolic of our view of the market, but there's no change to the principle of our dividend policy.
On the margin, obviously, when you have pressure on the rental income, the margin will be squeezed. This is particularly so, when actually you need to put in more money to do other things to promote the business, to do events and promotions, and sustain the interest and the appeal. However, having said all that, we actually have done a lot of work in looking at the efficiency of our malls. So much so that one mall, actually, and I think that is Parc, that actually shows a saving of over half a million dollars every month because of the fact that we reviewed the actual operating cost and increased the efficiency and effectiveness. A lot of questions you ask and comparison, again, amongst malls. Having said all that, of course, there is a certain limit you can do.
There is a basic overhead cost, and obviously running cost. The key, obviously, is the rental income.
Thank you.
Hi, I am Karl Choi from Merrill Lynch. Could you update us on the retail sales performance for the Shanghai malls in 2015 and where the occupancy cost of sales was at the end of, or for the full year? Looking forward, knowing about the rental disruption because of the renovation. Apart from that, what is the outlook for rent in the near term before the uplift from the renovation would kick in? Thanks.
I think if we exclude the renovation area of Shanghai and compare like with like for the remaining area of Plaza 66, my guess would be mid-single digit growth for our Plaza 66. Similarly for Grand Gateway, maybe slightly lower. If I may supplement the answer to the question on rental margin. I would be wary if the margin of our Shanghai operations dropped to 60%-odd , but that is not the case. The 60%-odd you see is subject to a lot of dilution of our very new malls. I do not recall that many major property operators that open up brand new shopping malls of our size in six consecutive years. Right? Each new one, when you add to your existing portfolio, naturally, before they go through the entire gestation period, it will dilute your overall average.
If you look at the three pillars, so far, our two properties in Shanghai and our Hong Kong entire portfolio, those margins are keeping up pretty well under the current market situations. It is only that each year, over the past five to six years, we keep adding on the brand new malls or brand new office tower. Each time when you add a new one, you have the one-off grand opening expenses together with what Philip said. You actually spend more money on advertising, promotion. You do have some margin squeeze on these newer malls. The margin of our Shanghai properties and our Hong Kong portfolio, those are keeping pretty well.
Thank you.
He just asked about the retail sales number for Shanghai. Basically, we are seeing last year up 1% each for Plaza 66 and Grand Gateway Mall. Up 1%. Sheila, anything to add?
Just a couple more questions. That HKD 266 million of revaluation loss, what percentage is it of the original values of those two properties? Also the second question is, do you expect more revaluation loss? Under what circumstances would they actually arise in the next 12 months? Thank you.
Answer to your first question is around 3%. Answer to your second question is I do not know, because I raised the same question to my valuer, and they gave me the same answer. It really depends on the business situation this year.
Sarah?
Just a matter of curiosity, have you had much interest in Blue Pool Road? Blue Pool Road. Maybe, Ronnie, you can pontificate a little bit about how you see Hong Kong's economic climate relative. We know what's happening in China, but how you think Hong Kong will fare.
Pontificate. I'm not the pope.
Blue Pool Road first.
Blue Pool Road first. We have received a few offers, but not up to what we wanted. We haven't really gone through significant advertising and marketing exercise yet. We wait for the opportunity.
Have you changed what you will pay the agents in Hong Kong? The commission rate?
No.
This is a very tricky question. We can only pay the agents what is legitimate.
That word is key, legitimate.
I think the point really is, we only have 18 houses, and there is no hurry to really flip them unless the price is right and the conditions are right.
Your Holiness. My Holiness. Oh, God. See the halo? No. Let me comment on the property market first, which is significant to the economy as well. I am of the opinion, and again, I think I am a lone ranger here, that the Hong Kong property market is as healthy as I have seen in 20-some years. A little hyperbole. The mainland residential market is perhaps as healthy as 200 years. Since I was not long enough to be there at the beginning, I do not know for sure, but I think that it is probably correct to say that the residential market in the mainland is also as healthy as I have seen in a long, long time. Hong Kong market is simple. You supply enough land. As long as the government is sensible in its land policies, prices can be adjusted. Look at Singapore.
Singapore has basically the same situation, and Singapore government has been able to adjust prices. Why can not Hong Kong? It is just because of mistakes that were made in the past. Now you correct it, and I think the present government is correcting it so substantially that we begin to feel it, and prices are beginning to fall. Right. So, one jet falls, people say, "Oh, oh, oh, it is falling." Do not forget, not too long ago, you were complaining the prices were flying. Now finally it is coming down. To use the Chinese saying, a Cantonese saying, "You are afraid of the ghost in the front of the ship, and you are afraid of the bandits at the back." Then you will not do anything. Well, that is how the market works. I think it is really moving toward a healthy situation.
The mainland market, that is even more controversial. I was talking to an expert from mainland China on residential market just two nights ago. Of course, she said, "Oh, this and that, this and that." I said, "Wait, wait, wait." I said, "Prices." Now, okay. The third-tier cities, the third and fourth-tier cities that is overbuilt, it would take three, four years, if not longer, for it to digest. No question about it. So forget about it. Okay? We are not there, and it is neither here nor there. First-tier cities, quite good. Shenzhen, for example, has been really hot, in fact, right? Shanghai is fine. The first-tier city, as we have always said, will always be relatively better. As I always like to use the U.S. example for comparison purposes, New York City will always have the most solid residential prices, right?
The tier-one cities in China are the same thing. It is really the bulk of it, which is the biggest portion, where unit cost is not that low, like in the third, fourth-tier city, and a lot higher percentage of the people have the wherewithal to buy resident, and that is a tier-two city. That is really most representative of the residential market in China as far as I am concerned. Okay? Now you look at that. What are we observing? Prices are not flying. Prices are not dropping precipitously. Volume is quite good. Taking the whole country as a whole, last year's dollar sales from property is up something like, I forgot, 14%? The square footage sale is something like up 9%. The transaction is there. The land price, the land sales, it is okay.
You don't see king of lands anymore, nor do you see a lot of what do you call it?
Aborted sales. I said to this expert from mainland China, it's a lady, I said, "Come on, isn't that the ideal situation if you're a government official trying to manage the residential crisis? Isn't that exactly what you want?" She said, "Oh, yeah. That's right. Come to think about it, yeah." All the elements of a healthy market is there. Then I went on to say, the only caveat is the following that I can see, and that is the way land sales is conducted. That has to change. By the way, I'm not the first one to mention it. Zhu Rongji has said it already at the 100th anniversary of Tsinghua University or something like that.
He came back out as the former Dean of the School of Management and gave a talk, long talk of hours, and one of the points he raised was this very point, is that the way the land sales is being conducted ought not to be determined purely by the municipality. Anyway, otherwise, prices you can have crazy market again one of these days. In order to limit that, you have to change the way the land sales is done or not the way it is done, but how to allocate the money, right? Lo and behold, one of the four main items of reform that Xi Jinping had just announced, one of them was, right? The finance and tax structure, which this is exactly a part of it. They tried a couple of years ago, do you remember?
In Chongqing and Shanghai, they try it as an experiment to collect property tax, right? Mixed results. That's why they haven't really pushed it nationwide. Instead, they come up with something. They come up with something that is halfway house, which really doesn't satisfy anybody, including the government. That is first home, no tax, but second home, third home, sure, the tax. I say, hey, how big is that market compared to the first home market? It's nothing. The government is not going to get what it wants. Anyway. Nonetheless, I think Xi Jinping is conscientious of the need to fix the financial structure and the taxation system. I believe that this will be a critical part of it, obviously. The real estate part. Hopefully China will get it right. For the time being, the tier two residential market, it's okay.
Obviously, it differs greatly from city to city. For example, in Wuxi the residential market is dead. Why? Because a couple of years ago, they chase away all the, what do you call it? The people who came from the villages, they chase them out because they want to similar to in Guangdong. What Wang Yang did to upgrade the industry and so forth. Instead of bringing the new one first, they kick out the old one first, and then the new one may not come in, right? They forgot that the one whom they kicked out had been in the city now for five, seven, 10 years. Usually after seven, eight, nine, 10 years of being in the city, these are the people who will begin to buy properties. So when you kick these guys out, there's nobody to buy the properties, right?
These are unintended consequences. So you asked me to pontificate. Let me make my final pontification. Let me tell you what's my main concern over the Chinese economy, and that is, and I wrote about it, unless the Director tell me to take it out, otherwise it'll be in my letter, and that is there are two ways to manage any system, including economic system, and that is one is to put in simple terms, free market. Just let it go. Just light touch by the government to manage a few things, rules and laws. Then the other one is the central control, right? Now, China is progressing from one to the other, and they have to progress from one to the other. But neither can they go all the way like the West.
Indeed, even in the West, they realize that they can't go all the way either, and hence the New Deal of 1932 or whatever, 1934, whatever. China would have to find its own way. But the problem is in this process, which is a long process, the complication is exponential because now they are fully integrated or almost fully integrated into the global economy. Whatever happen anywhere in the world can have unintended consequences on the Chinese economy, right? Your policy decision anywhere in the system can have unintended consequences elsewhere in the economy. So when the complication get exponential, I do worry about making mistakes that can have really serious consequences. All the things that the newspaper worry about, like all the debacles with the stock price, the [Non-English content] what do you call it in English? The circuit breaker and then the currency.
Hey, those are laughing stocks, no question about it. It's very embarrassing, right? But to me, no big deal. What the heck? China is like a jersey maid. You know a jersey maid? A lady from the farm, a peasant girl, suddenly thrust onto the center stage of the world, and she has stage fright and freeze. So they make mistake. It is natural. It's to be expected. Will those mistakes, will they damage the economy in the long run? No, not for a bit. Right? What's the big deal? So let's not get caught up and get emotional about it. Oh, China is so stupid. Government officials are useless. Don't forget, the Central Bank Governor was voted as the best central bank governor a couple of years ago by his peers in the world, right? So these are not dummies.
But in practice, they have never dealt with the actual market sometimes. The stock market, I am talking about, or the currency market. They have to learn, but the mistakes that they make, embarrassing as it may be, it is not detrimental at all. Let us just have a good laugh and get over it. Those are not the kind of things that would kill the economy. That which I do worry is policy decisions that have unintended consequences or unexpected consequences. They are intended, just that you and I may not know it, or the decision-makers didn't know it. There is unexpected consequences that can really damage the economy, and then it can also cause trouble in the society. One of the points that if I am talking too much, C.F., just tell me to shut up.
Yeah, about time.
Okay. I will end with this thing. This morning, two of our directors pontificate on the following. If the Chinese government were to be faced with a decision to sacrifice the real economy on the one hand, or slow down the internationalization of the currency, what would they do? I think we all agree with those two directors that they will protect the real economy and just slow down the opening of the currency. So what? Delay for another year, two years, it is not the end of the world. If they don't take care of the real economy, job creation, social unrest, those are the issues that I do worry about, and I believe they worry about as well. My final conclusion is this: The situation is very tough, but no way do I assume that China is in such deep trouble that it cannot recover.
The most likely scenario, as far as I am concerned, is to muddle through. Now, muddling through will take time, and the market don't have a whole lot of patience. Unlike you, I am not a market practitioner. I am a long-term operator and investor. Muddling through, in as much as it is not comfortable to most people, is, I think, at the end of the day, the most likely outcome of China's economy. So be it, and we craft our strategy according to what we think is the most likely scenario while protecting ourselves on the extremes. That is why we are still very lowly geared, for example. The extremes, we don't need to worry about too much. What if they just muddle through for the next two, three years? What will you do?
Well, we have our plan to how to take the company, how to strengthen the company during this period of time. I believe that we will emerge as a stronger company. I know that you do not like the stock price, neither do I. So I buy.
Okay, thank you, Ronnie. We have the final question here. Would you still consider to buy land, going forward? That will be the last question.
Answer is yes.
Okay. Thank you very much. That concludes today's presentation. Thank you again.