Okay, good afternoon, ladies and gentlemen. Thank you very much for joining the annual results presentation. Not only you, actually, we got quite a number of investors have already signed up for the webcast. Today, we have, as usual, Mr. Ronnie Chan, our Chairman, Mr. Philip Chen, Managing Director, and Mr. H.C. Ho, Executive Director, to host the presentation. What we will do, we will let Ronnie to give an overview before we open the floor for question and answer. Ronnie?
Okay.
It is the wrong button. Okay. Welcome. I think that probably the set of result this time surprised most of you. I think most of you, the reason none of you get close to the number, although we are a very simple company and very transparent company, is that it is only one reason. You do not trust me. Right? I told you that our valuer is Hey, what are you doing here? I know you. Anyway, I told you that our valuer is really quite conservative. So eventually, whatever we sold had a premium of about 40% over the June 30th balance sheet date.
70%. 70% over.
70%, okay. Right. Okay. You are right. You work it backwards, so it is 40% again. Most of you only took half of it. You are by 100% for that one reason alone. I think the rest are not that difficult to figure out. I just want to point that out, that is all. I think that, for the time being, I don't foresee ourselves selling as much non-core assets, like in the last 12 months. If we sell anything, it will be just a little bit here and there, if any. I am hopeful that we will be able to sell some completed apartments in Hong Kong. You all know that last May, we were hoping to sell 400, but that weekend there was a Greek financial crisis, and the stock market fell, and we only sold 108 units.
What you don't know is that before the Buyer's Stamp Duty came out, we already had the sales brochures printed, ready to sell another batch. I suppose the journalists will say that the government doesn't like me. They either say the government loves me or the government doesn't like me. Those are all, whatever they say is crap anyway. We were not able to sell at that time. I suspect that in the next 12 months, I am hopeful that there will be another opportunity at which we can part with a good number of our units. If it had not been for those two bad luck, we might have sold what, 600 units more in the last 12 months in the year 2012. Anyway, I just want to give you a picture.
I think the sales figure in mainland China, the retail sales figure in China, has improved. Second half was much better than the first half. That is in general, a high single-digit growth over the first half. I am hopeful that perhaps the recent weakness in the consumer market may begin to moderate. I am also looking at other things which may or may not have some real effects. For example, residential transaction volume as well as prices have gone up quite a bit in the last two, three months. Since October, roughly, of last year, it has really gone up. After the first half, the first 9 - 10 months of 2012 being really very weak in volume as well as in price. You can obviously see the residential market moving again. Even the stock market, which I don't follow.
I just look at the charts, and even that looks quite good in the last three months. Certainly much better than the previous five years, maybe. At least three years, say 3-4 years. Hopefully, there is some wealth effect there that will have some consequence positively on retail sales. That one, I am really not that sure. I am just telling you what I think may be the case. Addressing some of the specific properties that since you are going to ask me anyway, I might as well preempt you. Plaza 66, as you know, in the first half of the year, only grew by 2%. Part of the problem was, of course, the weak consumer market. Part of the problem was 15% of the space is with three major high-fashion tenants were refurbishing. By the third quarter of last year, they were basically done.
The last half performed much better than the first half. Overall, the whole year, Plaza 66 only grew by 4%. If you consider the fact that the first half only grew by 2%, you have to compensate for that in order to get a full year number of 4%. So roughly the second half should have grown by something like 6%. From 2% - 6%, it is a good advancement. The new stores that opened after expanding, we know the sales rent. We just are not at liberty to publish those figures, but we know what they are, and they are much better than before they had the refurbishment or the enlargement. So I think Plaza 66 is doing fine. Grand Gateway 66 is coming along very well, partly because of the upgrading of the stores such as Tiffany & Co., Bottega Veneta, Gucci, and so forth.
Grand Gateway 66 has recorded quite a good rent increase for the whole year. Again, second half was better than the first half. Palace 66 remains challenging, mainly because of one reason. The road was dug up again. Last time I told you that, "Thank God they finished digging up everything. They cover up everything." My staff told me, "Well, they haven't put on the top yet, but they nonetheless cover up already, so it should be on the way to recovery." Well, apparently, they open and cover, open and cover several times, including, I was told, before we opened Forum 66 in Shenyang. They knew that our board is coming. Many important people are coming, and when they come, some of you were coming. I saw some of you there, and that you're going to go see Palace 66. So they cover up.
We are, "Good. Finally." Then after we all left, the staff said, "Oh, no, they open up again." So basically, the bulk of last year, Palace 66 was an island, inaccessible by pedestrian traffic. So that's really a problem. Of course, we also told you that we have a second problem, that is we pegged the tenants too high, price point-wise, too high. So we are having huge exercise to change tenants. That's why we told you six months ago that our vacancy will go up, and it did. So it went up to slightly over 10%. But then we also know that we have already signed up a lot of tenants that over the next one year you will see a totally new shopping center.
Something like 30%-40% of the space and of the tenants changed, are in the process of changing. So we project a 95%-96% vacancy, sorry, occupancy rate later this year because we know that we are signing up leases and so forth. The unit rent is, as I reported in the past in every shopping center in the past period of time, have increased as we renew rents and so forth. So Palace 66 just have to grind through it. In fact, I told my staff, I said, "I wish they did not cover up, so maybe they would finally be able to cover up once and for all earlier instead of covering, opening, covering, opening." You all know, for those of you who have done business in mainland China, you know how amazing things can be over there. We're just bumping into one of those.
Parc 66 started out on the right foot and have done, continue to do well. We were at 7.9% gross yield on investment cost when we first opened, and now we are at 11%. Just by way of comparison, after one year in Shanghai, we are at 5%. After two years, we are at 8%. After three years, we were at 9%. After the fourth year, we reach 11% in Shanghai. But in the case of Parc 66, in one year and four months, roughly, one year and three, four months, we are already at the 11% gross yield. That is positive. Forum 66 started on the right foot. So yield was already above 8% when we started. It has improved considerably.
I may add also that rental margin everywhere have really advanced, in particular, in Palace 66 and Forum 66, the two shopping centers in Shenyang had the most improvement. For Forum 66, you may expect that because it is brand new, so your costs tend to be front-end loaded. Once some of those one-time costs get worked out, then rental margin goes up. But Palace 66, being already two years and a half old, the rental margin has also been improving. It actually doubled and more in the last one year. This year, probably in September, we will open Center 66 in Wuxi. I think the return characteristic should be very similar to Parc 66 and Forum 66. It should be around that level. We have already received deposit for about half of all the space, nine months ahead of opening.
In terms of actual discussions, some of them already agreed upon, but they just need to go through the paperwork and receive the deposit. Others are in very close negotiation. But when you add all that together, you are close to 80% already. So you have 70%, 80% basically done. So we have no problem opening it again, as everywhere else in our portfolio, basically 100% leased. Forum, we were 100% leased, but we are not 100% open because Chanel told us, Chanel is Chanel. When Chanel says, "Sorry, I need another two months," you have no choice. They have a huge, humongous site right in the dead center of Forum 66 for those of you who have visited it. They do not even want the facade and the outside shops. They want it to be right in the middle of it.
68, no, sorry, about 10 or more of these major brands actually open the first store in northeast China in Forum 66. A good number of them, it is the biggest store that they have in the whole of China. When Chanel opened, business was great for them, and of course it also has an effect on the rest of the shopping center. Back to Wuxi. Originally, I told you that my hope was that we will be able to open the low zone of the first office tower.
Shenyang.
Oh, Shenyang. Sorry, I keep saying the wrong thing. Forum 66. The low zone of the first office tower. End of this year. It turned out that there's quite a bit of technical issues that the city just cannot resolve. We may have to open the entire office tower the earliest end of 2014, which we were expecting the higher zone to be open at that time anyway, either end of 2014 or early part of 2015. They have a lot of technical problem. For example, the fire regulation. China just has never done it. In the rest of the world, you do it quite often, such as International Commerce Centre here, right? Many others. But in China, they just never open half of a building, a high rise. People, tenants actually move in and start working in there whilst they're working on top.
They've just never had that experience. The fire regulation, which, as you all know, is quite rigorous in China, just don't want to do that. We don't mind that. We'll lose a little bit of rent. But there's always risk when you open the lower zone and while they're still working upstairs. There's always safety issues. Even in Hong Kong, we all know that there were some very tragic events that have happened in the past. We'll open it with the whole building according to the schedule for the high zone, which means that we will not open the low zone first.
Ronnie Chan, can I-
Yeah, please.
Can I butt in and actually qualify that a bit?
Yeah.
That was always the set schedule to open the entire building. We had toyed the idea of whether we can actually open the lower part of it gradually so that actually we can get some rent. We have never actually committed to that opening date. As such, we actually have never signed up any agreement to get any tenant for that sort of trial opening, if there is such a word. Therefore, when we say lost revenue, it's not really a lost revenue. It is, let's say, forget that idea because of these technical issues, regulatory constraints, and we just go for the original plan of opening the entire building at one go when it's completed.
Anybody want coffee? I hate to be the only one drinking coffee in this room. Just raise your hands and my colleagues will be happy to get you coffee again. Or tea, whatever. Okay, so that's Wuxi. I think whereas there are signs that perhaps the slow consumer market in China may do better. But if I were to look at the statistics from the Chinese government and if I were to study reports from people such as Bain & Company, they have not given me a whole lot of confidence that the consumer market will recover anytime soon. It's just that our only experience is that the second half have done better than the first half, and it applies to every shopping center of ours. So perhaps there is something there, but it is just a surmising on my part.
Stock market is always a six-month leading indicator, so maybe that too is telling us something, but we would just have to wait for time to prove whether it is correct or not. So the safe assumption at this stage is that this coming year, the rental growth all over mainland China will still be similar to that of 2012. Hopefully, do slightly better. What I've just said, meaning performing similar to 2012, does not take into consideration that the consumer market really, really picks up, right? It is just business as usual. Then we should be able to grow as we did this year. But of course, we have new shopping center added in. Last year, Forum 66 only had, what, three months of operation, whereas the coming year, it'll be 12 months. Center 66 this coming year will have three to four months of operation.
When you put all that together, we'll probably still have, hopefully, a mid to high teen growth in total rent from the mainland of China. In terms of buying land, we're always looking. I wrote six months ago that we should not be too greedy. None of us can time the market perfectly. Moreover, things in mainland China can move very, very fast. It can surprise you on how fast the market turns. We are just looking, studying, and if there's good stuff at the price that we like, as you know, we are very stingy in that regard. If something that even a stingy guy like me can afford, I'll buy. That's mainland China. I wonder if Philip and H.C. have anything to add on the mainland of China before I go to Hong Kong.
Okay. I think Hong Kong is doing quite well.
Retail rent grew faster than everything else for our portfolio. I think that the coming year, again, I'm sorry to be so boring. I think this coming year is going to be very much like last year. Whatever it grew at, it is very possible that this present year will basically be a ditto of the last. I think I said already, we probably would not sell too much non-core asset, at least not as much as we have done in the last 12 months. But I'm hopeful that we'll be able to sell some completed apartments. You want to make some comments on financing and all that stuff, H.C.?
Yeah. You also note that from our balance sheet, we have further strengthened our positions and our net cash situation at the end of last year exceeds HKD 6 billion. At the same time, there's an increase in our cash and bank balance. Over 90% of that we put it into renminbi deposits. You all know that the renminbi deposits have a much higher interest rate than Hong Kong dollar deposits. In a way that this company is in a very privileged situation, that over the next few years, we need a fair amount of renminbi to pay for our CapEx and our construction cost. So this is a very good window and opportunity for us.
While on one hand, we issue bonds, $500 million bonds last year to lengthen our borrowing portfolio's tenure, while at the same time in managing the interest rate volatility risk. Also at the same time, we benefit from the interest differentials between the two currencies. So it's very unusual and rare that you will have this kind of opportunity to manage different kind of risk, while at the same time you add value to your own positions. So you see that in terms of financing, I think we are in a very strong positions to seize whatever opportunities that come along for us to build a land bank or any good growth opportunity presented to this company.
On the dividend, some of you asked me last time, how will we treat dividend? The board see it fit to propose a little increase in the dividend this year, primarily for one reason. That is, we sold a lot of non-core assets. It's not because we sold The Long Beach, but mainly because we sold a lot of non-core business. We grew dividends a little. If you oppose, feel free to vote against it at the AGM.
Why don't we open the floor for questions? Would you please raise your hand and let us know the name of your organization? Thanks. Christie?
Christie from Jefferies. Two questions. The first one, of course, very strong results. Congratulations. The question regarding the new generational leaders, we see a lot of anti-corruption issues. As of last year, we're seeing some of the slowdown in luxury was talking about less gift giving. I think given this anti-corruption is likely to continue. Ronnie obviously mentioned the sales for second half is much stronger. Do you foresee this gift giving may have some slowdown longer term or will have some impact? Is this something you're concerned about? Regarding also in terms of potential competition, November 11th, in China, they call it have one of the strongest e-commerce sales, and it was a blockbuster, surpassed everyone's expectation.
HKD 1.4 billion, something like that?
Even higher. Yeah. It is a very, very strong
Yeah. I read a long article about it.
Absolutely.
Very interesting.
Is this something potentially you would start to think about? Given your asset is obviously very prime location, delivering good results. Longer term, how big a threat e-commerce may have? Also for people traveling overseas to buy luxury goods.
Are you thinking about the e-commerce thing?
Yeah.
The November 11th, right?
Yeah.
Right.
I think those are the two questions.
We studied the e-commerce. We even had two experts from China came to the board meeting one time about a year or 18 months ago to tell us the picture, what is the lay of the land in the mainland of China in this regard. The board had a lot of discussions. Basically, we feel that it is something to watch, but it is not something to, at present, worry about too much. Especially when we are in the higher price point products. If you are just selling commodity type of products, then you really should worry. If you're buying baseball cap, you just tell them the size and the color, design, and it will fit. But if you are talking about buying a Chanel, then it is a totally different story.
While we watch it, and I think I might have told some of you, I am also in contact with some of my friends in America, big shopping center owners, some of the biggest, that we exchange ideas, or I seek advice from them to see how they see it, because oftentimes what happen in the United States can have a delayed effect in this part of the world. Basically, our conclusion is that for the time being, something to watch but not something to be overly concerned about. The 11/11 thing, that is really truly amazing. I tell my American friends about that story. But it is really selling a different kind of goods. What is your first question? Oh, any question.
A journalist asked me that question also today, and my question to you, ladies and gentlemen, is, can any of you tell me, are there any data on what percentage of the luxury segment retail sales is gifting? So far, nobody has been able to tell me that number. Maybe some of you might have seen some reports. I will be very interested to read that, including how the hell did they get that information? But, as I told the journalist earlier, one evening I was at Louis Vuitton at Plaza 66 after they opened up the new one. I did not even dare to walk in. I think they will kick me out. So I asked my Manager to go with me, and then I got a VIP tour. And I saw five groups of people buying things there with children, with wife.
It is really end users that I saw, but I dare not say that there is no gifting. Probably there are, but how much it is, what percentage, God knows.
How big is the gifting sector?
I don't know. I have no idea. One number I'm more sure, and that is how much of the luxury goods are purchased outside of China. As you remember, the experts that we invited to our board meeting, he gave us the number of 56%. I read in the Bain report of last December that said 60%. So it is within the ball parks. That 56%-60%, roughly, are actually conducted in Hong Kong, London, Paris, wherever. In the last couple of months, through my various community services such as [Perak Hong Foundation] and Asia Society, I hosted dinner for one of the commerce vice ministers. I asked him, "When will you take away the, or at least minimize the luxury goods tax in the mainland of China?" He gave me the reason, which is a reason I did not think of.
I thought that it was just a mathematical issue. When they get to a point where you're losing more tax money by imposing the luxury tax because you're losing so much of the business. When the crossover point gets, maybe China will do it. Well, that is an economic man's thinking. The vice minister gave me a different reason. Not that my reason is not valid, but there's a more powerful reason. That is, politically, it will be a little sensitive because it will be seen as benefiting the rich. We're lowering the tax for the rich. So now, when I put the two together, I say, "Ah, okay, fine." The crossover point mathematically would have to be so painful that you have to balance that with the politics. Right. But that Vice Minister assured me that it's just a matter of time.
That the luxury goods tax will be somehow altered. I don't think it will go up. It can only go down. So it may not go away altogether, but it may lessen. In which case, it's great news for us. As you all know, in Hong Kong, we don't have Louis Vuitton as our tenant or Prada or Dior, but in mainland China, we have all those guys. So I think it'll be good news for us, and I'd like to see that number go down from 60 -0 . I mean, I'll be a happy man, but I don't think I'll see it. I think shopping overseas, Hong Kong, Paris, whatever, is still a pleasurable thing. So we're doing also other things in our shopping centers in mainland China to improve the experience, the shopping experience, which is so important to these luxury markets.
We got a question here.
Can I just add that actually, I am actually expecting e-commerce and all that to be a facilitator for shopping. I mean, when you really think about it, we are just human beings, and we like bricks and elbows. In my own experience, I want to buy a camera, I check everything on the web, and then actually I went to a shop. You know exactly what a camera would be like anyway, right? That kind of experience, I think a shopping mall, a good mall can offer you, cannot be replaced by just facing a screen. I do not want to tell you the entire study I have done, but I just want to tell you one thought, and that is, when video conferencing and all these communication equipment appeared, people say nobody will fly anymore. What happens now, we fly more often than before.
When the computer first came out, I remember in the 1970s and '80s, people say that paper will become useless.
Yeah.
Everything will be on a computer. Well, paper business has been thriving.
We buy more printers now.
We've got a question here through the webcast. Regarding the CapEx plan in the coming three years, can H.C. address that?
Yeah. Our CapEx over the next five years, actually, is added to HKD 30 billion . You can stretch it out roughly about HKD 6 billion per year. That's the kind of CapEx commitment we're facing.
That includes the Kunming Spring City 60-
70, yeah.
Which we just broke ground two months ago.
All the projects we have on hand.
That name was confirmed, right? Spring City? I cannot remember.
China, before it takes about a year to actually approve the name. We are just using it now.
Sunny Tam from Merrill Lynch. A question on policies. What is your outlook on the Hong Kong housing policy, and what do you think the government can do, and how does that impact your launch schedule this time? You had bad luck last year, but if you prepare more this year, probably work around. Do you think anything could come out these few weeks or maybe later? On the dividend, you just mentioned that you increased the dividend a little bit because of the disposal gains you had last year. Going forward, if you are not going to sell as much this year, can we still expect something like HKD 0.57 final dividend or HKD 0.17 interim, the same pattern we saw in the past few years, or would you increase it when your rental income actually goes up by the teens in China for the next few years? Thanks.
Well, I cannot guarantee you that we will keep raising the dividend, but our track record tells you something. If it is an indication of the future, then we try not to lower the dividend. Before we added a couple more cents this time, obviously, we asked management, "Hey, can you maintain that at least going forward?" I suppose it does, but we recognize that next year we will not have as much sales proceed or profit from non-core properties. So will we be able to sustain that kind of dividend just using rental? Because this year we are already basically paying out 100%, if you only count profit from rental. Well, rental will grow next year. Obviously, the board has considered all these things. By the way, we had a wonderful discussion, I thought, this morning.
We really have a high caliber board, a really good discussion on dividend policy. Hopefully, it will not go down. How much it will go up, we will see. Hey, do you want to-
Yes. By increasing the dividend payment this year does not mean that we depart from our long-established dividend payment policy, which is stable and with progressive growth. Yes, we increase the payout a bit this time, but it does not mean that we depart from it. We still maintain the wisdom of being prudent. At the same time, we reward our shareholders at appropriate time.
You have a first question.
On Hong Kong policies. How is it?
Oh, yeah. Okay. My view is the following. First of all, what is the cause of the problem? The cause of the problem is that Hong Kong, basically for 10 years, has not sold land. The first couple of years I can understand, Asia financial crisis, SARS, and I give you another year after SARS to recover. So pre-2004, pre-2005, I can understand. But thereafter, there is no excuse in my mind why there was no sales of land until we forced them to by 2011. Nonetheless, you look at that period of time. When an economy did not sell land for 10 years, what the heck do you expect will happen to residential prices? It is as simple as that. Now the question is how do you reverse that negative effect?
A lot of these Chinese newspaper, the caliber frankly is very, very low, keep saying that distant water cannot extinguish a fire at home. My answer is, okay, don't just criticize. Give me some proposals on how to, in a short term, in a very quick way, extinguish the fire at home, so to speak. Right? I have yet to hear anybody with any proposal that is workable without serious negative side effects. Nobody has figured out anything yet. So don't tell me that the government is not doing its job. If there is no such solution, there is no such solution. Neither do I think that the land policy that has come up in the last couple of months will not address the short-term issue. I think that it will. It may not take effect in three months, six months.
But consider the fact that you begin to relax. Oh, no, sorry. You begin to hasten the process of approval, for example. Right? This year, they are approving twice as much units for sale as last year. The problem in the past was not just not selling land, but also the fact that the government did nothing to build up a land bank. So now the present government gets into position, and even if it wants to sell land, there is no land to sell. That is why the distant water cannot extinguish a fire at home. Right?
Yeah.
My view is this, I am very happy and open-minded to hear proposals on how to solve the problem in the short run. But there are some problems that cannot be solved in the short run. Right? I think the problem in Hong Kong is easily addressed in the longer term, in the medium to longer term. It is very solvable. Unlike the Mainland Chinese residential market, I really do not know how to tackle that one. That one baffles me. I study and study, and the more I study, the more lost I am. But the Hong Kong one is very simple. So I think that the government's policy, I believe, in the coming couple of months, it will take effect. Let time work it out. Let the effect of those measures work through itself, and I think it will work.
Do you think a vacancy tax would be probable or like appropriate?
See, the vacancy tax, again, I ask the question, who has studied the vacancy tax? We do not need to reinvent the wheel. If other people have studied it before, let us see what they have said and done. Right? I know of. Does any of you know a city where they actually apply the vacancy tax? Which one?
London.
London. What year, roughly?
Currently in the industrial space.
Oh, industrial space. Oh, I see. Okay. And the result?
I think most of them are happy with your landlord.
Did it work out well, huh?
No. You still give a lot of space to charities.
That is good. You are the first person that gave me an example. I was looking for one. I just cannot think of one. I figured somebody must have tried. But of course, industrial is very different, huh, I think you will agree, than residential. And so basically, there is not a whole lot of examples of how the market will respond to a possible vacancy tax for residential. In fact, technically, how do you structure it? I think there are so many potential problems. My answer is let the experts, and let the government, and let the scholars go figure it out, so that we know what this whole beast is all about. Let us figure out what it is first, and then let us decide as a community whether this is something right for Hong Kong. It is way too early to say.
There is just no sense talking about vacancy tax when we do not even know how it works, right?
Sarah Cooper from Merrill Lynch. The last time I sat here, Ronnie, I think you said that you had very itchy hands, and you had to sit on your hands because you didn't trust yourself not to go and buy something, which I took as you being countercyclical and seeing that potentially the dislocation in the market was going to throw up some really exciting opportunities. Now, you're saying, I think, that you're actually not too sure what's happening in China at the moment, and you're not even going to sell your Hong Kong properties at the same pace. You said just to start, "Don't expect to see us sell so much non-core in the next 12 months." Is that because you're bullish Hong Kong and you think commercial values are going to continue going up in Hong Kong?
Is it because you're bearish China, and you don't see opportunity to redeploy given your balance sheet still net cash? What are you thinking?
Well, I'm always ready to buy, and that includes Hong Kong. But I just don't think that my opportunity to buy in Hong Kong is very promising. Just too many players here. Mainland China, I think the possibility of our buying there is far better than in Hong Kong. When we do buy, it surprises sometimes even ourselves, meaning that the market comes so fast, the opportunity comes so fast, that you just have to grab it when the moment is there. You look back, we bought two pieces within one to two weeks in May of 2009, I think it was. I would not be surprised if opportunities will come back. I just don't know when, and we're always looking. As I wrote six months ago, that opportunity may present itself in the not-too-distant future.
If I buy, don't hold me to my own words that I always sit on my hands. I think that land purchase is something that we are very watchful of.
Then not selling the Hong Kong non-core. Is it still non-core or is it-
No. We don't have-
Not replaceable?
We don't have a whole lot of non-core. Most of the stuff is core or pretty core. The building in which you are sitting now, right? In Douglas Street, we have a lot of stuff. We have three buildings there. In Causeway Bay, we have a lot of things. In Mong Kok, we have a lot of things. In those kind of areas, I don't see us selling too much. If you were to analyze from our annual report, you have that page that talks about all the property we own. After selling the last round, which is last about a year, the outlying non-core, older, aging, slow-growth property is diminishing. It's nothing to do with the market. If we had more, we might have sold more in the last 12 months. I think a lot of people were taken by surprise.
They thought that we would gradually sell it over three years. The reality is the market, you have to catch the opportunity when it comes, whether it is to buy or to sell. We deemed the opportunity to be there, to be with us the last 12 months. When we can sell at 4-5 cap for these very old and slow-growing properties, I will sell it. Of course, equally important is the fact that we are recycling our capital into mainland China, where in the last two years, everything we opened, basically opened at close to 8% yield. It is almost a no-brainer.
Eugene from UBS. I have got two questions, particularly on the Shanghai market. First, I have seen some statistics on the office market saying that in the Puxi area in the next few years, the new supply will be 50% of the stock. Do you think this is a-
30%.
50%, yeah.
50%.
Do you think this is a credible statistic, first of all, and how would it impact your portfolio? A similar question for retail, while you expect the overall retail market will still grow at a similar rate, but since there are more shopping malls, do you think that each shopping mall's growth will actually be diluted even though the overall market has grown? Thank you.
Well, on the office market, I ask the question, what is the most important for office buildings? I think location is one, but to really summarize it in one word, it is prestige. You have to build a reputation for your product. Good location, best design, well-constructed, good management, quality, that kind of stuff. We have seen pretty tough times in the last five years in office. You look at our office portfolio in Shanghai, it has not grown much in five years in terms of total rent received. We have really seen some pretty bad times. Knowing mainland China and knowing the quality, which is very high of the leadership in Shanghai, they are like Singapore. They do think ahead and plan for what is needed tomorrow, unlike Hong Kong, which is really, really laissez-faire in this regard.
Not to mention that the limited possibility of land to build offices. I like to think that in Shanghai, we have seen if you are used to luxury, it is very difficult to go back to hard times. We are very used to hard times in the office market in Shanghai, and we know how to defend ourselves. As far as the retail is concerned, Eugene, you know that I have this analysis that I am just surprised that people do not talk about. I think it is very simple, and I like to think that it is very correct. That is, you tell me, how many developer of quality retail space that hold onto their properties and do not sell for the most part? How many are there in the whole of China? Hold onto it and build quality retail space.
When you analyze it that way, I submit to you that it is probably no more than five or seven in the whole of China. I know your head is right now thinking, who are those five or seven or are there more? I do not think that you can name more than six or seven in the whole country. The rest, perhaps 95% of all the shopping centers, once it is strata titled, quality just goes straight to hell. In the short term, they may dent my pricing power, but very quickly, those guys will absolutely take themselves out of the competition once it is strata titled. You cannot control your neighbor, you cannot control the quality, you cannot control the look and this and that. Really, you are only talking about five or seven players in the whole country, and I am being very generous.
There is a couple from Hong Kong that know how to do it, and they do a very good job. But even then, there is probably no more than, not counting ourselves, no more than two or three in the mainland of China. Not every one of them is very aggressive. Some of them are, frankly, rather non-aggressive. Then you have probably no more than two or three mainland players because you need the financial wherewithal to do that. They are all state-owned enterprises, basically. In a huge market such as the mainland of China, you only have six or seven players in the whole country. Now, you tell me, is that a crowded market or is it not a crowded market?
When people say, "Hey, the retail market in China is really crowded," I thought to myself, "Total" Well, I am on camera, I have to be careful what I say. Total crap. You do not even analyze things. You should not call yourself analyst if you do not analyze things. The market, frankly, is wide open. Competition is not keen at all. How many people have we bumped into in buying land in the mainland of China? Not that many players. You have more major players in Hong Kong residential. I can name you 10, 12 of them, which are all very sizable, very big in a very small market called Hong Kong, which produces probably roughly 16,000, 18,000 units a year. That is it. But now we are talking about the commercial market in the mainland China, and anybody who strata titled it is not my competitor.
Again, I say they do affect my pricing power in the short run, but pretty soon they are gone. Have you seen these global fashion brand names stick to shopping centers that are strata titled? I do not want to say this too much to the public. I do not want to attract more competitors. But the reality is, even if I say it will not make credible competitors out of not credible ones. Because you need expertise, you need money. You need many things to play in our league. I think the retail market is very favorable in the mainland of China. I count myself very fortunate to be in a segment of the business which has very favorable economic dynamics.
We got a question here. An investor would like to see the impact of the renovation in Plaza 66. He asked whether we can compare Q4, the retail sales comparing to the year before, so that he will see after the completion of all the renovation in Q4 last year and the year before, 2011. So that he will see what kind of impact and the future contribution.
Is he asking retail sales or is he asking about-
Retail sales
or rent or?
Retail sales.
Retail sales.
Well, I think retail sales should improve after renovation. In fact, I think one thing we have learned from it is actually we shouldn't have all three major brands renovating at the same time. They all wanted to do at the same time, because when the other guy is actually renovating, it's the best time for me to renovate. Otherwise, when I renovate, he will take advantage of me.
Okay. That definitely affects the overall sales figure. So I presume actually, when they're all back in business in full swing, that figure should be obviously more positive. Obviously, that has to be put into context of the overall environment, which Ronnie described, the first half, second half comparisons and all that.
Okay, you got a question there? Amy Wong.
Amy Wong from JP Morgan. Got two questions. The first one is related to the yield on cost other than Plaza 66. All the rest so far is getting close to 8%. For the other upcoming ones like Riverside 66 and Kunming, are you expecting similar kind of yield? My second question is, any update of the appointment of the Executive Directors for the China development?
What's that word you used? I didn't hear one word you said. Can you repeat the question, please?
The second question?
Yeah.
Is the appointment of Executive Directors.
Oh, I see. Okay. Well, I think when we started all these new projects, the original estimate, as you know, was only about 4%-5% initial yield. If you look at Shanghai, that was how it started at that level as well. Actually, obviously, I wanted to be a bit more aggressive and push it further. In Jinan, we are in a unique position and we achieved more than that, and so was Forum. Obviously, I hope Wuxi will follow that newly established norm. Certainly, every project we push forward, we want to start as the gates open at 4%, we want to surpass that figure. Okay. That's your first question. The second question is about the appointment of Executive Directors. Actually, we have got very capable guys heading those departments.
There is a person already immediately took over the roles and responsibilities of development, planning, and design. He has actually done a very good job so far, and been already putting in very positive contribution. On the construction side, actually, we have divided the department into various teams, each in charge of a specific project, and that is functioning pretty smoothly at this point in time. Obviously, I have to closely work with them to overlap and enhance the system a bit more, and that's being done.
Christie?
Just one more follow-up question regarding the land banking. I think, Ronnie, in your recent Chairman's statement, you start to hint a little bit about residential. Can you talk about that?
On the mainland.
Mainland, yes. Can you talk about that? What do you think about the residential market outlook for 2013?
Well, first of all, we're not going to turn ourselves into a Vanke or a R&F or anything like that. Our residential, which in the past couple of years we increasingly think about, and hence wrote about, is that we don't mind doing some high-end residential that are all ancillary to a comprehensive development. Meaning that I have a shopping center there, I have some offices there, and why not build some residential next door for several reasons. Number one, sometimes the plot ratio that the government demand is so humongous, and I'm not sure if I want to build unendingly larger and larger shopping centers. Offices, we are also very, very cautious. Residential, frankly, is easiest to sell. And if the residential is right next to the most prestigious shopping center and the most prestigious office tower in the city, obviously those residential will be very valuable.
Not to mention the fact, money comes back very fast. Wouldn't mind that either, because we are mainly in the build-and-rent business, which by definition has a very low volatility of capital churning. So to supplement that with some residential is not a bad thing. And we'll increasingly do that. The project in Kunming has some residential. Wuxi, we have a whole site adjacent to the main site that we bought a year or two later after the first site was purchased, and then in Forum 66. So in Shenyang. So all these have some residential element to them, and we're very happy to build them and sell them.
Okay. In view of the time, perhaps we can accept two more questions. Okay, John?
Hi, Ronnie. John Chen from "Shanghai Journal." I know you're looking at your China projects. Your initial model was to get 4%-5% yield on cost. And like you said, you've been getting close to 8%, maybe close to 11% in the first year even, I mean the second year. And your original model was to double your yields with subsequent leasing cycles, et cetera, and maybe even triple in following months. My question is the reason why you're getting these 8% yields now because you are more confident in the tenant mix? Are you taking away the upside from your tenants? What's the outlook for the subsequent leasing cycles? Will you be able to double or even increase by 30%, 50% in the fourth year, for example? And then I have a second question for you.
I always want to take away everything from my tenant as long as I can keep a good relationship with them that is long-term, which is another way of saying that we have to balance each other's interests, right? You cannot kill the goose that laid the golden egg and charge him very exorbitantly high rent once and then never to see them again. That's certainly not a way to do business, especially for people like us who has long-term hold. I must say that Mainland China has been surprising us positively several times. For example, did we realize that Shanghai was going to be that lucrative back in 1991, 1992 when we bought those land? If I were to tell you I expected it to be that lucrative, I'd be lying. It is just a rising tide, that rising flood that lifts the boat to the heights.
That's all. Well, I shouldn't say that's all. We have our share of contribution, as evidenced by the fact that not everybody get the same kind of return we do in the long term. In the short term, other people do the same. Other people are getting 8%, 9%, 10%. I know that. Frankly, the market has been very kind to us. The same thing with Parc 66, Forum 66. The market has been kind to us. The question rather is, can you sustain that kind of level and indeed grow from that base? That would depend on many things. How good is the city that you have chosen? How good is the location that you've chosen? How well is your design, construction, and management, all that stuff. We just have to do what is within our control and hopefully do it well.
We realize that we have plenty of room to improve, I can assure you that. The rest has to be, frankly, relying on the good grace of a fast-rising economy. So far, we have done reasonably in terms of what we can control. Reasonably only, not exorbitantly good. But the market has been extraordinarily kind. So, when you have a combination of the two, you're fortunate. We're fortunate. Looking forward, moving forward, it is never wise to just rely on luck or the market externally. You've got to be able to compete favorably against your competitors. That is something that we are working very hard to improve. I think that the arrival of Philip has really helped greatly in that process to upgrade the systems. We just don't tell you what we're weak in.
But we know what we're weak in and hence, a lot of work.
Okay, John, you have the time, okay?
Just one last question. Your balance sheet is clearly in a very strong position, and if you do go and sell some residential in Hong Kong, it will be even stronger by the end of next year. Your CapEx is probably HKD 6 billion, so you will still be in that cash position, in all likelihood. What is going to trigger an opportunity for you to buy a site in China? We have not seen any good sites in the last year. I know you have a list of 40 - 50 cities in your side pocket you are looking at all the time.
You want to see it again?
The economy is improving in China, that is our view at least. So there may not be any desperate sellers like we saw in Kunming. What is going to trigger an opportunity for you? Thank you.
What would trigger, frankly, is the maturity of sites that we have been working on for a long time. As you know, the kind of land we buy and the way we buy them take a lot of time. If the market is there, we speed up the process. If the market is not there, we may not speed up the process as much. I can only assure you, John, that we have been working diligently in the last two years since we bought Kunming. A year and a half since we bought Kunming. As the Western adage go, you have many fire, right? You have front burner, back burner, and sometimes front burner gets thrown to the back, and oftentimes out of nowhere, back burners suddenly appear, pop in front of you, right?
We are constantly juggling those burners, and we have many burners that we work on. As you know, I love bad markets, and I'm not unhappy with the last one year. I know that my retail sales get hurt a little bit in terms of the growth rate moderating. But that too offers opportunity. So it's like the duck feet. As the Chinese say, the underwater that you don't see, but we're paddling very hard under the water. I just don't know when it will materialize. If I do, I won't tell you. Because we may not win the deal. The government can change the decision. New leaders and new mayor can have a very different approach to things. Kunming just had a new mayor, by the way.
It may offer us some opportunity to get certain things done that we have not been able to get done in the past year or two. So we are working very hard, like the ducks paddle under the water that you don't see. But all I can do is assure you, John, that we are paddling very hard. I speak very slowly. That belies the fact that underground, underwater, we are paddling very fast. So once I have something to announce, John, you'll be among the first to know.
Okay. Thank you very much.
Thank you.
That concludes the presentation today. Thank you.
Thank you.