Okay. Today we have Ronnie Chan, Chairman of the Hang Lung Group, as well as Hang Lung Properties, and Philip Chen, Managing Director, and Executive Director, H.C. Ho. I would first pass on mic to Ronnie.
Okay. I will just make a couple of observations. The first one is good news on the numbers and not that good news in the non-numbers. Good news on the numbers because we broke records in turnover as well as in underlying profit. HKD 17 billion on one and HKD 10 billion on the other. But the trading condition in which we play are still pretty tough. I do not think the Chinese economy is that bad, in fact. I think people probably overreacted.
I think the market is actually quite healthy, including the real estate sector. Last Monday, I chaired a session on China at the AFF, the Asian Financial Forum. Every year we ask the same question for everybody to vote, and everybody said that the local government debt is going to be a problem. But none of the speakers believe that it is going to be a problem, neither do I.
There is a disconnect somewhere. I think the market oversold and perhaps one of these days it will play catch up. That said, the sector that we play is probably one of the weak links in the market. The higher price point consumption, I think is one of the few areas that is still very weak. Worse yet, I have no idea when it will recover because it is as much politically driven or policy driven as it is economics. Also, I just want to make a point that we are also facing challenges internally in terms of management just not catching up with the speed of growth externally. Externally, by that I mean all the happenings. Consider the fact that in the last five years, the square footage that we manage and own in the Mainland has something like 3.3x , all in five years.
In terms of our rental turnover on the Mainland, it doubled. Our staff count, just executives, forget about the blue collar, so to speak, or the regular office workers. The executives have in the last five years, 3.5x . On top of that, I think many of you know that before Philip joined, his predecessor, Nelson, had to, shall I say, let somebody go. Very senior people. It is all written in the It is all discussed. Everyone know about this. I am not telling anything new. I am just giving you the context. After Philip joined, in fact, right after he joined, we had to do further management team adjustment. We basically had three Executive Directors let go within a few short years, while at the same time, the company was undergoing tremendous changes that I just described.
Those numbers, 3.3x square footage and double the turnover rent in Mainland and so on. You can see how the challenges has been tremendous. To use Philip's analogy, Philip is an airline man at heart. He said it's like changing a broken engine in midair while flying. That's basically what I had to do after Philip came. I was a bad guy. I had to do a lot of things to make changes, then hand over to Philip and say, "Okay, Philip, build a new team." That's basically what has happened. Philip, in the last four and a half years, have built a new team. I don't know how much I should tell you. It may scare you, but anyway, you guys have dumped our shares anyway, so it is okay. We have 12 assistant directors.
Only one of them predates Philip. Most of those positions were created. They were not people that we fired and then we had to find a replacement. No. A lot of those positions were created because of the need of the impending expansion of our business. You can imagine the challenges. I think Philip has done a fantastic job in many areas. One of them is really building a very good construction team. Hang Lung, I don't think has ever built so many things. We built a lot in Hong Kong in the 1970s and 1980s. But Hong Kong is a market that we know, and there's very little complication there, so to speak. But going into Mainland China in many different cities, it was complicated. I think Philip did a fantastic job building a good management team in the construction side of things.
However, we readily admit that the team is not perfect yet. We still, in the leasing side, in particular, the leasing and management side, there's still a lot of further team development. We have not been sleeping. We've been building the team. Just that, as I told shareholders, at least those who read my letter to shareholders, we have completed the equivalent of more than one New York City Empire State Building every year for the last five years. If we were to continue at the same speed, it would take about 9- 10 more years to complete the job of what is already in our land bank. All of them are already under construction. That speed of development, I submit to you that is never seen anywhere in the world.
Of course, I know that some of you are going to challenge me and say, "Oh, there was one company that has gone public recently." But I'm talking about world-class stuff. I know how to build Oh, this is on microphone, I better be careful what I say. But anyways, I can build crap very easily. But to build world-class stuff, and make them work, is a tremendous amount of work. We know how to do it, but we need more hands on deck to execute. Those are the challenges. I don't know when the market will recover, as I stated earlier. I think for that, you have to go talk to Xi Jinping and no less.
But one thing is almost as certain as the sun rises from the east, and that is consumerism in China is going to be at least one of the big stories of the world in the next 20 years, 30 years. That I think is, barring any unforeseen nasty situation otherwise, that is as certain as anything. And we are well-positioned to take care of that as long as we complete building a world-class team. So in that sense, I really do not care too much when the market recover. We are just taking our time to build up our team, and hopefully we will have the team in place well before the market fully recovers, in which case, we should become one of the biggest beneficiary of the long-term consumer growth of China.
I just cannot see how that is not the case. So right now, it is winter time. In winter time, cuddle in bed and do whatever, but just do not do too much, except that which is necessary to prepare the company for the coming opportunities. Philip, you want to add anything?
Thanks. I think I agree. I think the pendulum has swung the other way a bit too much. And, like any business cycle, what goes up will come down, what comes down will go up. And we always take a very long-term view of our business. If you think of more ways, at least 40, 50 years to go on with, and every business cycle will take, say, seven years. You are talking about seven business cycles, at least in that period of time. And business cycles are more intensive and actually deeper and faster these days, too. So I am not too worried about the coming challenges. And I admit there are going to be challenges for a variety of reasons, which Ronnie has just alluded to. So let us see. I think we will do our very best to do what the company needs to do.
Philip, would you like to take the opportunity to talk about the asset enhancement initiative in Hong Kong?
Okay. I think last year this time, I think we said that we will operate a few of our properties in Hong Kong, one of which is this very building. I said, actually, we'll have one of the most expensive restaurants in Central down here, and Mott 32 opened on time, and I hope you have all tried it. Have you?
Oh, they didn't try it. They eat there every day. Come on. It's not like you and me.
Oh, okay. Well, next time you have a vacancy, can you call me? I'm just upstairs. Obviously, they are doing very good business. Our amicable relationship with the bank goes on. We have a very good banking hall and as card is okay. We have actually about 25% at least rental increase from this building on a very high base already. More impressive, I think to me, is Causeway Bay. Despite Occupy Central's impact for that period, which affects our tenants. We are obviously protected by the contracts, the leases. But obviously we want our tenants to make a lot of money. Actually, there is a rental growth in 2014, despite also the fact that we are upgrading a lot of our properties along Paterson Street and the streets behind.
Now, if you go there today, you will already see some of the new shops, including a very good Italian restaurant, which I would highly recommend to you. It's called I.T. I.T., I T, which is a good pun of Italy, I.T. It's actually started by the chef who actually started Isola at IFC at one stage. He's now running this casual Italian place, which I highly recommend. Again, they are doing very good business. More importantly is the look and feel of Causeway Bay has really gone up. We're now opening the Paterson Street side. Some of it is still under behind board hoardings. But you have already seen L'Occitane and a very interesting ice cream shop right next to it. Michael Kors will be moving in. All that actually is happening.
Very soon, the Hang Lung Centre, which is the former Sa Sa and Mannings and Starbucks, they are giving way to H&M. H&M will probably open by the end of this year. The rental increase is very substantial over there. While this year we still have this renovation upgrading work, which will affect our income, I bet next year, you will see the results, I think compared to 2015. Even The Peak, that actually has gone up a bit. It will increase income, with some very interesting new tenants and rationalization of some of the leases. The Korean Trick Eye Museum, I hope you have been there, has just opened and it is very popular. We have actually the same Trick Eye Museum somewhere in China in our malls too. Even Kornhill, actually has gone up. So the money invested into it, and they are already seeing results.
Some of it we complement by our very hard work and good strategy. I am actually quite happy to see progress in Hong Kong.
Okay. Probably we now welcome any questions. Feel free.
Thanks, management. I got three questions. First of all, it is more of a question on numbers. You recorded about HKD 110 million increase in fair value in China investment properties. May I ask if there were any particular project you recorded a deficit? Because you actually got one project completed during the year. This is the first question. The second question, we have seen some occupancy changes over the past year for some of the second, especially the newer shopping malls. Would you consider that as a proactive approach of management managing the tenants, or actually it is more of a reactive result, so tenants have to leave, and you need to figure out something else to fill in the space?
Finally, on the investment strategy, given that land prices in Hong Kong has dropped, while in China, land prices haven't dropped that much, would it make sense to actually come back to Hong Kong and consider some projects here? Thanks.
On the valuations, the HKD 110 million is mostly the gain relating to our properties in Shanghai. None of our other portfolio properties outside Shanghai actually record any losses. They stay pretty flat. It also reflected the rental performance in the past year. We are going on to talk about the turnover, which you know anyway. The tenant turnover actually is quite normal. Normally in a stable situation, even in Grand Gateway a couple of years ago, we look at the past record. We have about a mid-teens tenancy turnover rate, which is necessary to keep the freshness of the mall and the revenue going.
Obviously, for newer malls, the tenancy turnover tends to be a little bit higher for the simple reason that some tenants may think they're maybe overambitious, and they think they will be a big hit, and they find that they are not a big hit, and we want to change them. Obviously, some of them will see the demand change and decide otherwise. These things happen. I won't give a generalized answer. We're looking very closely at mall by mall, individually. William, you want to talk about Hong Kong or should we-
Well, Hong Kong real estate companies these days are basically financially very healthy. Some companies who once upon a time was heavily geared are today in a cash. I just don't see where are the opportunities. When people dare not buy or no money to buy, that's the time to buy. So why bother? We're always hunting, we're always looking, just to make sure that we don't miss anything. That's why when we bid at something, when CY Leung just became the CE, everybody was shocked. We watch everything. We thought, "Hey, try it. Why not?" Didn't make it, didn't make it. Didn't win, didn't win. Whereas in the mainland of China, because the country is so darn big that there's always microcosms everywhere.
I remember one governor said to me one time, and it was the governor of Shanxi, he said, "You guys talk about the real estate market being hot, and hot." I said, "Where I am, it's cold, and cold." There's always microcosms that are different from everywhere else, and hence, give us the opportunity to pick up some good deals. That's how we bought Wuhan, for example, right? Within seven months after we bought, a similar piece, worse than ours, doubled the unit price. Crazy. There are such opportunities in mainland China that Hong Kong being a much smaller, much simpler, and much more transparent market, just don't have that kind of opportunity. You tell me where I should put my money.
I actually don't think the Hong Kong land price has come down a lot, actually.
Right.
I really don't agree with that statement. If you look at, actually, the reason, I'll say, rumors about one piece of land being transacted on The Peak, right? You know the past, things like Twelve Peaks and all these properties go at over six-digit figures per square foot, right? You're actually speculating on land costs rather than really be a developer. Furthermore, the construction cost in Hong Kong has gone up tremendously on a per square foot basis. Ronnie just mentioned Wuhan. When we got Wuhan, a fraction of those prices, in fact. It's just no comparison at all.
Okay. Ken?
Hi. I have questions on Shanghai first. You have delivered a decent 7% growth in rentals. Can you give us an idea what kind of the rental reversions achieved on the malls in Shanghai last year? What do you project regarding this year? If, let's say, the retail sales continue to be fractured, what kind of rental reversion do you foresee in Shanghai? The second question is an update on the yield on cost. Can you give us an idea on the yield on cost on the completion last year, Tianjin, and the expected this year project, Dalian, and the both office tower? Thank you.
For the reversion in Shanghai, the Shanghai mall, the Plaza 66, it still managed a double-digit growth for the shopping malls. Similarly for Grand Gateway. For the office at Plaza 66, we have seen lately negative reversions of something like 6%-10%. That's, I think, largely due to the increasing supply in the Puxi area. However, for the office tower of Grand Gateway, its reversions for Grand Gateway is positive high single digits. The initial yield on cost on Tianjin is about 4%-5%, as what we expected for new projects like Jinan or Tianjin, although some of those are actually doing much better than 4%-5%.
Also the question about the Dalian one, the initial yield.
Based on the current leasing progress, we expect that Dalian one also somewhere between 4%-5%, and there might be a possibility of exceeding 5%. It really depends on the leasing situation over the next few months.
There is a question from the webcast. Online sales is taking a bigger share. Do you think shopping mall has passed its best days?
Passed its days.
The best days.
The best days. I am sorry to offend people. I think people are crazy to think that shopping centers have passed their best days. I always tell people, "Would you like to sit at home watching your TV flat screen, a beautiful lady? Or would you like to be sitting in a Starbucks and watching all the wonderful ladies sitting next to you drinking coffee?" The answer is simple, isn't it? I do not know when did mankind become solitary animals. Sure. Online shopping will take and has taken quite a bit of business away from some sectors. The lower-end products obviously suffers more than the high-end, in particular, high-touch stuff. High-touch stuff, you really need to feel the fabric, put it on your body, see how your body reacts, and this and that.
If you are in the low-end shopping center business, then you have a little bit more to worry. If you are on the high end, as we have always been from day one, you are relatively shielded from it. That said, we are using technology, using internet to make the shopping experience a richer, fuller one. That is something that some of the younger staff among us are spearheading. I suppose they are just more savvy in the internet days, and we just have to let them run with those ideas. No, I do not think that the best days of shopping centers is behind us. No, not at all. In mainland China in particular, there is not a whole lot of places to go on weekends.
That is why I tell my wife, I say, "Hey, the sports business is going to be huge in China." On television and actual arenas and stadiums and so forth because there is just nowhere, very little places where people can go. A shopping center is just one that has already become a social phenomenon in many of the major cities in China. Anybody want to take a bet from me?
On what?
That shopping centers will still be very, very good business 30 years from now, at which time you will be 40.
Sarah, do you have a question?
I think I'm coming into my fifth year here. I think this is the most bullish I've ever heard you. You said that you think
Right
the market's oversold. If you roll forward a year and obviously, you've got a huge and a long pipeline to fund. If you imagine that we're sitting here in a year's time, can you imagine your balance sheet looking much different to what it does today? Will you see new opportunities through the year that have sort of changed in pace from the last 12 months?
You want the CFO perspective or my perspective?
Well, you are saying you think the market is oversold.
Yeah.
You have been waiting for this rainy day. We have been in the winter, we still are. But are we getting closer to the point where those itchy hands that you were talking about come out and really start accelerating the spending? Is now the time to lift your balance sheet up a little bit or are you still going to wait?
Well, land purchase is one thing. That is the itchy hand that you are referring to, I assume. That is frankly very opportunistic for us, for our strategy. You just never know when it is going to break, the deal is going to come. But our CapEx already is humongous if we do not slow down construction. Roughly, what, HKD 7 billion a year for the next five years, maybe even a little bit more, actually, possibly. So our balance sheet will change if nothing else changes. But obviously, there are many moving parts. We still have seven units and eight units of The Long Beach to be sold. We still have a lot of car parks that is really worth quite a bit. We have Blue Pool Road. So when you add them all up together, even at today's prevailing market price, that portfolio is still pretty sizable.
Every year, actually tells me that we will be in debt at the end of the year. But of course, his assumption is always the most conservative one. We do not sell anything and no rent increase or whatever. Interest rate goes 15% or whatever, crazy. All these conservative stuff. Our board want us to do stress tests, and they are so stretched, oh man, it borders on lunatic, really. Well, we have to do it, and we do it. So, on the both sides of the ledger, a lot of outgoings, but we really do not know how much we are going to sell and monetize assets. So if you were to ask me, "Will you be in a net debt position at the end of the year?" I said yes last year, but I have been wrong because we sold half a side, right?
If you were to ask me again, I would say yes again. But if we sell The Long Beach, we may or may not, we are not in great hurry, then maybe we will be in cash again. It is hard to say. But the trend is that as we sell off, as you know, Sarah, we do not have new land bank in Hong Kong and so that is it. Once you finish selling them, you will go into a net debt situation unless you tap the capital market or whatever.
What about the pace of opportunities on the ground for land in China? Are you sensing a change from local governments? Are they approaching you more?
Are you sensing anything different, Philip?
I think that China is a very big place so you cannot really generalize if a mayor comes to knock on your door. We do occasionally have people knocking on our doors but I will not say there is a sea change.
Well, let me say one
You got to work very diligently for a very long time at each opportunity. Sometimes even if the situation may be, in general, not as bearish as you would like, there may be one or two very good opportunity you can capture.
Why do you think the market's oversold too far?
No, I think the sentiment of the international investment community is just perhaps a little bit too bearish about China. I think the economy is better than what they think. The West, the big money, may wake up and say, "Wow, maybe we acted too fast to sell out." Or, "If we didn't do that, maybe it's sooner to get back in than later." I think there's a distinct possibility of that.
There is a question about the dividend policy. Since you got that much CapEx to be spent in the coming five years, would there be any change in terms of policy? We actually, in fact, increased that.
We haven't changed our dividend policy at all, which we've been saying that we maintain a stable growth of dividend per share policy, whether we have property sales or not. Despite the HKD 9.8 billion sales turnover this year, we haven't really changed our policies, really. I think if I may supplement the answer to Sarah's question earlier on, the hard part of answering that kind of question is, if we simply answer that question from a static point of view, that's easy. Everyone can plug the figures into their whatever financial models. Seriously, not that many of us here actually could predicted that last year we could sell that many residential properties here at such a margin. Right. The exciting part of the world is there are so many moving parts, like what Ronnie said.
Coming back to the question on dividend policies, no, we haven't changed that at all. You'll see that from this year's final dividend also.
Thank you. Joyce, and then Amy.
Thank you. Joyce from Credit Suisse. Hi, Ronnie. Can you give us more idea on what has performance on the ground for at Plaza 66?
Our what?
Performance on the ground, i.e., the tenant sales performance at Plaza 66. I reckon that in the last interim results you've been talking about you've got some tenancy refinement exercise, like expanding some of the well-performing tenants like LV, Tod's, Chanel, et cetera, and it's also been acknowledged by some of the industry reports and says that even F&B been changing quite tremendously. I would have imagined that the worst time should be in 2013 and 2014, where we've got these tenancy refinement exercise, we've got anti-corruption, and we've also got Jing An Kerry Centre and iapm mall competition, et cetera, coming in. Combining all of these, including the statistical base and the outcome of these tenancy refinement exercises, what should we be looking for in 2015 in terms of year-on-year retail sales at Shanghai shopping malls, more specifically Plaza 66? Thank you.
If you want to answer that, it's all here.
For Plaza 66, we saw a 4% drop in its overall retail sales. While at the same time we are doing a tenants refinement, as you say, basically what we have been doing is moving in more upmarket and better tenants onto the higher floors, like the third one, the fourth one. At the same time, the management is also changing the F&B tenants of that mall also, because the current tenant mix of the F&B tenants at the Plaza 66 is not up to the exact positioning we want it to be for that mall. For the Shanghai Grand Gateway 66 shopping mall, it experienced a single-digit retail sales growth, actually. It is hard to just generalize so much that with the anti-opulence campaign, the luxury consumptions sales have been dropping in China as a whole, slowing growth, so on and so forth. That is true.
But even with our two shopping malls in Shanghai, they perform slightly differently. Okay. It is hard for us to predict what would be the luxury sales growth like in Shanghai this year. We are only into the first half of January this year. But I personally do not expect that will be a dramatic change from this point on. But we just do not know how the anti-corruption campaign, the anti-opulence campaign, will develop into something else, right? I do not have a crystal ball on that one.
If I may add, this must be the best time to do whatever you need to do to that mall and upgrade it. So we have just got the board approval not very early on to upgrade the two malls in Shanghai, and we have actually done a lot of groundwork now. So I hope the actual physical work will start by summer this year on the office tower in Plaza 66 first, followed by the mall.
That is going to be a challenging exercise, because you have got to really do it at night, put the carpets back in before sunrise, and operate as usual during the day, and then pull up the carpets and do it again at night. So that is actually a very challenging exercise. But we are confident that we can actually finish that by 2016. And you see a very interesting new mall, with the same characteristic. We are not going to change the positioning and the appeal of Plaza 66. This is a crown jewel, and you are not going to alter the crown jewel. But there are lots of things you can actually do to improve on it. For example, the external appeal. You can see the big light towers, the lanterns we call them, outside are not thorough. But they will actually be renovated and upgraded.
The partitions inside and the basement, for example, are some of the things you go in and you create a wow. This is, I think, the best time to do that. So 2015 and 2016 , you will see the major upgrading exercise for Plaza 66. We do not want to have two malls undergoing upgrading simultaneously. So Grand Gateway will follow a little bit later, maybe nine months later in terms of schedule.
Okay. Amy, and then Kai.
Amy from JP Morgan. Got a follow-up question about the performance of Grand Gateway in Shanghai. Actually, you mentioned that is a growth-based in the announcement. Just want to follow up, is that because of the enhancement that you have done on Grand Gateway, or is a trend that the more mid-end sales is seeing some kind of recovery? That is my first question. Second one is about the margin in the China rental portfolio. We are seeing some kind of compression in the margin. Is it mainly because of Tianjin or there are also some other factors affecting it? Are you expecting that will go back to a more normalized level at the mid-70s? Thank you.
On the Grand Gateway one, I think we start seeing the benefit of some of the uplift in the tenancy mix that we took initiatives of about a couple of years ago. Maybe perhaps because of that, and also partly because it is not really right at the top end of the consumptions, and we experienced a single-digit retail sales growth of that mall.
With regard to the overall margin of our mainland portfolio, for Shanghai overall as a whole, for the shopping malls of Plaza 66 and Grand Gateway, basically it stay about the same as before. For the offices at Plaza 66, and we see a small drop in there. But bear in mind, for all the malls outside Shanghai, Plaza 66 in Shenyang is the oldest one. Even so, we are only talking about four years old. Right? You do not really judge a child from its birth.
Now, naturally, we expect that it takes at least the first lease cycle to go through the gestation period. Every year, when we add a new mall or a new office tower to the whole portfolio, inevitably, you will average down the overall rental margin of the entire mainland portfolio. That is the main reason of that. This is nothing new. Even when we first opened Plaza 66 and then the mall in Jinan and then the one, the Shenyang Mall, Forum 66, the second mall in Shenyang, we have been seeing that. I think over the next few years, like this year, we will open another huge mall in Dalian. The brand-new office tower in Shenyang, Forum 66. All this will continue to average down the overall margin of the mainland portfolio. I do not think there is nothing that we should feel very surprised about that.
Overall, as we always been saying, we look at this as a long-term business. It has got to be long term. From the day you decide to buy the land, up to the day that you complete it for operations is at least six to seven years. Philip also talk about that for commercial property of at least 40-50 years leasing life. You have to go through six or seven cycle. The way how we do our business is not because of the current market environment, then you stop all the construction all of a sudden immediately. If you do that, in a few years' time, when the cycle reverse, you got nothing else to earn rental income.
What we are doing is just to prove that our confidence in that market, our confidence in our own strategy in the whole market, will continue our construction at our own pace. By adding newly completed properties to the portfolio, we will average down the overall margin. There is no secret about that. There is nothing for us to worry about that. We just continue to manage our portfolio to optimize our income.
Thank you, [inaudible]. Macquarie, then Morgan Stanley.
Hi, it's Kai from Macquarie. I actually have a few questions. I guess I will ask one by one, which make it easier. The first question, I think it's interesting to look at your occupancy cost for the China portfolio. I think it's the first time you said the mainland total sales from retail exceeded CNY 10 billion. I look at the total rental number you had is HKD 3.9 billion. Convert that into renminbi, translate roughly 30% occupancy cost on average for the shopping malls in China. Shanghai is roughly 20%-22%. That's half of your portfolio. Does it mean that the occupancy cost for the new malls outside of Shanghai, occupancy cost is as high as 40%? If not, could you give us a breakdown? That would be appreciated for the new shopping malls.
What would be the occupancy cost for each individual malls?
Based on the information I have internally, none of our malls occupancy cost actually reaching the 40% mark. For the malls outside Shanghai, it ranges from 25%- 30%. For the similar reason I talked about earlier on. For the newly started mall, it has a relatively high occupancy cost ratios. It's not the end of the world to us. In fact, some of the tenants that located our mall, we suspect that they never do any sales business at all. Look at Apple shop as an example. People go there just to want to touch and feel about their product, learn about how to use their product, but they seldom conclude any sales there. Not a great deal. This is the part of the changing dynamics and the landscape of our business.
At the same time, it doesn't mean that with e-commerce, the existence, it will kill all the physical mall entirely. This is again, another major topic that we've been talking and discussing with different people. I think with the changing business environment and the landscape, we do not see that when a mall reaching occupancy cost of, say, 28% or 30%, immediately from a management angle, then we have to decide the future fate of that particular mall. It doesn't work that way, not the way we see it.
Okay. Thank you.
Can I just add, Kai? Sorry. I think it is a fair point. Apple is a very interesting example. That is why since a few years back, I have decided that we should increase our base rent as much as possible instead of just sales rent. As much as possible. Of course, the market forces are something you cannot ignore. The rationale is very simple. Number one is why should I take the risk for the tenant that if he can do business, then he pays me rent. If he cannot do business, he does not pay me rent. That does not sound quite right from my point of view, right? Number two, obviously, the nature of the tenancy is changing, such as Apple. The more F&B you have in there, I am very sure that F&B have their own ways of accounting as well.
Number three, incidentally, figure out that a higher base rent is actually an incentive for you to work harder. If you are paying no rent, I mean, there is no incentive for you to come back in the morning to open the doors. You do not have to pay your rent anyway, right? So a higher base rent actually drive you to actually seek improvement. I think we found that out very quickly in some tenants. So the net of it is actually we know the nature of some of this is changing sometimes. The higher mix of new malls and the improvement on our basic rent instead of just the sales rent.
Okay, you got a second question. The second question, actually, a follow-up question on a previous question. You mentioned about the margin for the whole China portfolio. I understand the second-tier cities definitely going to have a lower margin. Could you sort of give us a number, what margin are these new shopping malls are running at? In particular, the new ones and the ones open for three or four years.
In general, for brand new mall, in its first year, it would be around 30%. Bear in mind, we also have many one-off marketing and promotion expenses during the first year. But one step more, having been through its first lease cycle, normally we crank it up to something around 50%.
Okay, so you would say it's between 30%-50% in general for your malls. Just a last question on CapEx. This year, the reason why the company goes into net cash position is because of more non-core residential sales. Looking to next year, if I remember correctly, the CapEx will be HKD 5 billion-HKD 6 billion. How the company would like to finance that? Is that via more residential sales in Hong Kong, or is there any non-core asset you want to divest to fund that CapEx? Thank you.
Okay. Again, if I answer your question in a static way, we just finance it out of our HKD 40 billion cash on deposit. That's more than our projected CapEx for the next five years. But if the residential market in Hong Kong sentiment stay its current way or even slightly better, we may sell some more residential properties. Not simply because we need that money to finance our CapEx. We got HKD 40 billion sitting in our bank account. Again, one should not say that we decided to sell some residential property now, doesn't mean that we see the market here turning. We do not necessarily see it that way because what can you expect by realizing 76%, 78% margin from property sales? How many developers in Hong Kong have that kind of margin?
Morgan Stanley.
Thank you. This is Praveen. Two questions. The first one has two parts. The first part is dividend. Market might be expecting you to give slightly more dividend, maybe because you had a very good sales through in the property market, in the residential. Even if you remove that, your rental income also went up between 6% and 11%. It did not came exactly as dividend expected. The second one is interest expense. It actually went up even though your cash actually went up. It's probably because you had an MTN program, but it was unrated. The question is, why are you raising money at a higher interest rate when 10-year treasury is going down? Is there any way to see the difference in next year going forward? I have a follow-up later. Thank you.
On dividend, our board does not decide on the dividend amount simply based on market expectations. We do have a dividend policy, which I explained earlier on. On the interest expenses side, we took our own initiatives to manage the future interest rate risk. Part of that is to prolong the tenure of our entire debt portfolio and the compositions in our entire portfolio between variable and fixed rate debt. Early in the year, we printed $500 million seven years bonds. That's the reason for that. The proceeds from sales of properties of residential flats did not really come through until the last few weeks of the year. If I had a crystal ball, I would not even have printed that $500 million early in the year.
As a company with prudent financial management, we always prepare ourself for whatever unexpected circumstances that could happen in the market. That's why I say if you simply look at the figures on the surface, you wonder why the company, the net interest expense has gone up. Okay? The timing when we printed for some seven-year bond and the subsequent residential sales and then the subsequent sales proceeds come back, it's a slightly mismatched in timing. But it's well spotted by you, and that's the reason behind.
I add something. Sorry, I know a lot of you work for banks. I don't trust banks. Our board doesn't trust banks. There are some board members that are very strong on this, and I have to say that he is correct. That is, if you have a bond, which is obviously a bit more expensive, 4%, 5%, it's in your pocket already. The bank said that you have a line. Are you sure you have a line? I'm old enough to see horrors. When days are nice, fair weather, sure, banks chase after me to loan me money. You know what? I think enough said, right? We want to have a balance between fixed income and bank debts. We know that interest rate has been low, and it's very tempting to just go all bank debt.
But it is, I don't think, prudent from enterprise risk perspective to do that. So we would pay a little bit more. As one of the directors said to me even this morning, he said, "Ronnie, just look at it as insurance." You're paying for a little bit of insurance. So it is really prudent to have a little bit of higher interest rate, but money in your pocket. You asked about the dividend. Let me tell you something. I challenge any of you to show me one real estate company which has a board that is as active, as independent as Hang Lung.
If there's any way you can measure it, if you can find a major real estate company in Hong Kong that is half as active and really fulfilling their responsibility as board members, non-executive board members of publicly listed company, it got to be Hang Lung. I know of no other, and I know because they're all my friends. We had a big debate this morning, for example, on dividend. Eventually, we have some that advocate paying more. We have some that advocate zero increase. Eventually, one of them said, "Well, Ronnie, why don't you just decide?" I decided that. At the instruction of the board. Let me give you a number. In the last five years, if you were to take the earnings per share and the dividend per share, which is bigger? The earnings per share is slightly less.
We actually paid out more than we made. But of course, that's because we know that we're going to sell properties. Right? Almost even, but just slightly more. We have to be very careful how we treat our cash. Looking at all the CapEx that has come, looking at the volatility, well, not the volatility, frankly, a little slow market right now. We deem it, the board eventually as a whole deem it prudent to not be overly aggressive. At 3-point-some dividend yield, percent dividend yield, we are already on the high end of our peers. Moreover, next year, what if you don't sell any residential? Don't sell any Long Beach, for example, huh? Then it's plausible that we only have rental income again. Personally, I don't think so. I think that's a bit too bearish. Nonetheless, it's plausible. It's possible.
Then what do you do? Lower your dividend next year? We try not to lower our dividend. We cannot guarantee that we'll never lower our dividend. But so far so good. We would much rather be a little conservative and gradually increase our dividend absolute dollars. Hey, 3-point-some percent dividend yield is very respectable.
Okay. We have one more question, and then the last one. Okay.
Okay. Thank you. I will be quick on the second one. I was looking at the Mainland new projects pipeline. I see some changes here. You are going to open office tower in Q1 2015 and then Olympia 66 in Q3 2015. After that, no more openings till 2018 or 2019. You have probably changed some of the second maybe Forum 66 other office towers, et cetera, further down than before expected, which is great. What I think what market would like, again, whether you would like to deliver or not, is on a same-store sales basis, if retail rental or the total China rental income grows at a certain number that you can commit without a new opening. Market likes those numbers. Meaning to say that because between 2015 to 2018, there is no opening, but still you are going to grow at 10%, that is awesome.
I do not know how much visibility you have on that. Thank you.
You want to give us what? What kind of numbers?
Rental income growth in China.
Oh, I see. To predict.
I am trying to understand the rental reversion which will come through. Tenant reversion will come through. Hopefully, that drives the growth. People want to understand what kind of growth without adding new capacity you can grow.
We do not have a crystal ball. This year, actually, that which was the most worrisome, frankly to me, is not the mall in Shanghai. It is the office in Shanghai. We are under quite a bit of pressure as actually gave you some numbers already. We always try to keep it full as much as possible, which means that we will have to be a little bit softer in the rent. It is really difficult to really foresee what the growth rate is going to be. I do not like to yap. It is easy to yap. The only thing is next year I have to see you again. It is just not our practice to say too much that we are not certain of. We would much rather build reputation as I like to think we have, that whatever we tell you can basically rely on.
There's much less guesswork when you hear what we say. If we were to guess, it must be we have considerable confidence that most likely is going to happen. You can take our words basically at face value. That's what we're trying to do. I'm surprised, Sarah, you think that I'm so positive, optimistic this year. I told you relatively, but I told you, we have huge challenges. It's not so much from the exterior environment. That one, I think there's not a whole lot we can do anyway. But the internal challenges of how to get our own team right, and right first of all means quantity right. Just to get enough able bodies to manage the growth, tremendous growth that we are having, is in itself a challenge. Let me tell you.
She doesn't like to tell you, but let me tell you this, that if we have had a better team and a fuller team in the last five years, we could be performing better today. Which implies that we have not been running at our capacity. I can run 100 meters in 9.97 seconds, but we're doing 10.2 seconds or whatever, and obviously there's room for improvement. Which implies that we have challenges, mistakes that we have to fix. So Sarah, relative optimism is really relative.
Okay. We have the last question from Coleman. The mic.
I'll raise my voice then. Question for Ronnie. For many years, analyst questions and financial questions were mostly on Hang Lung Properties, not so much on Hang Lung Group. I can't even recall when was the last time analysts raised questions on Hang Lung Group to you in the result briefing. Are you okay with that or does the board have any long-range plan to beef up the business at the group level?
Beef up what?
Are you happy with the structure of the company? Are you happy with the Hang Lung Group?
I understand that your firm did the restructuring for another firm recently. Answer, no business. I answered you, right?
Okay, since we have a very brief question and answer, we can accommodate one more question. The final one, really.
Let me just ask my question regarding the restructuring, actually. My another question, a quick one, can you give us an update on the pre-lease for your Shenyang office and the expected initial-
Shenyang office.
Yeah. Also the pre-lease progress for the Dalian. What is the expected initial yield on cost for the Shenyang office?
You are from Bank of America?
Yeah. Yield on cost. Initial yield on cost.
Initial yield on cost.
No, you are from Bank of America.
BFA.
Right. We just met with [inaudible] . Anyway. The answer about the restructuring is the same. Sorry.
The pre-leasing of the office at Forum 66. Is that right?
Yeah.
It's around 20% for Forum office. So your yield on cost on which one?
On the office.
On the office? Forum 66? It's around 4%. Yeah.
Also the question about the Dalian commitment rate.
We welcome tenants summer next year, because in Shenyang, this time of the year, you cannot really do any construction. Yeah, it is not opening yet on the tower, that is.
Dalian.
Dalian, we are still doing our construction work, obviously. Pre-lease at this point in time, about 40%, a bit over.
On Dalian?
Dalian. Yeah, the mall.
I think the office that none of you asked is Wuxi. Frankly, I was more concerned over the Wuxi office than I was over the Shenyang office. But frankly, I was a little pleasantly surprised that the Wuxi office has leased up quite well. We are only at 50%, but hey, 50% in that market in today's environment is a darn good number. I have no doubt that in the coming months, that number will go up. So it turned out that Wuxi is at rates that are quite acceptable. So we are, personally, I am quite pleased with Wuxi. The Shenyang is, I thought would be easier, but Shenyang actually, it is quite a challenge. Sorry, Philip.
No, I think the 50% is not for you referring to the entire building, which is right. But when we actually launched this product, we deliberately closed off the high end because we do not want a light here, a light there, and a light there and somewhere else. So we actually did not lease out the higher end, offer the market a higher portion of the building. But we lowered the mid-levels and the lower levels. The 50% is basically from these 2 zones. The high zone is actually going out to the market soon.
Okay. Thank you, Philip. That concludes the presentation today. Thank you very much for coming. Thank you.