Good evening. Thank you very much for joining the analyst presentation this evening. The session actually is now being broadcast live through the Hang Lung website, and investors are also welcome to raise questions through the net. Today, we have Mr. Ronnie Chan, Chairman, and Mr. Philip Chen, Managing Director, and Mr. H.C. Ho, Executive Director, to host the presentation. I will leave the time to Ronnie.
How about I leave the time to you all? I think you all have seen the. Unless something major happened in the day or evening, all of the reports already came out. The whole column, these journalists really are fast. But actually, the questions they ask are not really the ones I like to answer. Usually, the questions you guys give are far better. Why don't I just open to you all. Unless, Philip, obviously, you want to make some comments first?
No.
Then very happy.
Okay, this is just a wake-up call.
I need it in. You don't. Here it comes again.
We welcome questions from the floor as well as questions from the investors through the webcast.
Go ahead.
Sarah, take the first one. You need a mic.
Sarah Cooper, Merrill Lynch. Just to start things off, obviously, there's been a lot of speculation and concerns lately that there's a lot of supply and there's issues with leasing and rents and oversupply and the cooling environment on the ground. If you could just start, Ronnie Chan, with your overview of what you're seeing on the grounds.
Well, first of all, 18 months ago, I already wrote about the slowdown. I remember participating in a conference in Beijing. My fellow panelist said, "Oh, I don't see any slowdown." You can't hear?
Okay, just double-check the mic, Chris.
It's not working. I don't think the battery. No matter where you clip it's just not working. Just not working. You want to see?
Yeah. Okay.
The screen camera?
No.
Okay. There we go.
Yeah, sorry. Okay. First of all, 18 months ago, I already wrote about the slowdown. We know it from our experience in the front line with the shopping centers. I remember in Beijing, sharing a podium with a major mainland developer, and the person said, "No, we're doing very well. We don't feel it at all." I was shocked. Either he's not feeling it or he's lying or something. There's no denying that it is slowing down. In fact, it has gotten worse. That said, your other point about competition, I don't know how many times I've repeated. Nobody seemed to buy my argument. Let me try it again.
The high-end commercial, in particular, shopping centers, are rather non-fungible. You cannot replace one with the other and think that they are the same. It's unlike the bottle of Evian water versus a bottle of Nongfu. You know what is Nongfu? In China, right? Evian is a big French brand, one is a local Chinese brand. To me, I cannot tell the difference. It is totally fungible. You give me one, give me another, I don't care, right? They are fungible. But high-end malls are rather unfungible as long as you get it right. As long as the location is good, the size is good, the design is good, the construction and management are good, then it is rather unfungible. I will give one example.
A lot of people say that Shenyang is a highly competed market, a hotly competed market, and it is true. Every research report I have seen lists the four most competed city in China. Every one of them has Shenyang together with Chengdu or Tianjin or somewhere, right? If that is the case, how does one explain the phenomenon that last year, about nine months ago, we opened Forum 66 in Shenyang with 100% occupancy up to date. To date, it is still up 100%, with major brands coming in for the first time in the Northeast, and in some cases, the biggest in the whole country, in Shenyang.
As a result, our initial yield, our initial gross yield, was something like, what, 9%? If competition means something to the market, then how can somebody achieve that? You achieve that if and only if you produce a product that is not fungible. A project that people cannot replace something easily. It is not 100% fungible, of course, but for the most part, unfungible. As a result, while 90% of the shopping center, I would imagine, in Shenyang is struggling. We are getting, this year, probably we will get 10% growth yield. Highest we have ever had, ever, in the history of Hang Lung in the mainland of China, and opening 100% occupancy.
So yes, I fully recognize the presence of competition, and I wish they don't exist. But if you could choose the right cities, so do others. The difference is, which site do you choose? How big a site do you have? And what kind of design do you do on it, right? And what is your construction and management quality? As long as you do those couple of things right, that is what I mean by the genetics of a project. You have got to get the genetics right. I got the wrong genetics, I will never play basketball. Yao Ming got the wrong genetics, he will never do rings or jump in a horse in gymnastics, right? He will never do it. He will break all his bones. He got the wrong genes.
So you have got to have the right genes. Every real estate project has its own genes. The genes are the elements which cannot be changed, once fixed. But unlike the biological genes, where we have no choice. Some of you are born beautiful, some of us are born ugly. Well, too bad. That is genetics. But in a real estate project, it is totally determinable by the developer. So if you do not choose the right genes, you have got no one to blame. You can always say no to a site. You can always say no to a certain design, right? So the whole point is to get the genetics right. And I like to think that in Forum 66, we are not perfect. We have a lot of issues. There is a lot of challenges. But somehow we got something right, at least some of the genetics fit.
As a result, we never have a problem. Rent, we get a 100% lease, good rent, base rent, and yielding 9%, 10% in the first year. So yes, I recognize the presence of competition, but you also have to recognize the specific characteristic of a particular segment in the business, such as in the high-end commercials. The lower-end stuff is much less fungible, right? If you go to Carrefour, you go to Walmart, Metro, it's about the same. So that is very fungible. The only thing that's probably not fungible there is location. That's why we don't want to be in that business, because anybody can do it.
In Mainland China, we're opening Wuxi in about a month and a half. We're almost 100% leased, 90%-something leased. Good names. Great names. Some of them don't want us to talk about it, so we won't talk about it until we open, but when you come, you're all welcome to come, right? September 16th.
16th?
16th, yes. You're all welcome to come, and you'll find out who they are. Great names. So please, don't just go with the wind and just repeat. You know what Nalzaro says? He repeated what Goebbels says. You know who Goebbels is, right?
He says, "You repeat a lie enough times, people will believe it to be the truth." Now, I don't say that it's a lie to say there's a lot of competition and all that stuff. That's true. But to apply competition to someone with the right genetics, may render that fact not applicable. I'm happy to say that every one of our projects have the right location, have, I won't say optimal, but a near optimal design of a competitive size, constructed very well and managed decently. So when you put all those things together, you're okay.
We have a question from an investor. What's the CapEx plan for this year, and how much we have spent in the first half this year?
We spent HKD 6.5 billion during the first half, and we expect to spend another HKD 3 billion during the second half, mainly our China construction expenses.
The 6 point some billion in the first half includes HKD 4.2 billion-
Payment of the Wuhan main. For construction wise, it is only HKD 2.5 billion.
In the first half?
In the first half. Second half, then is another HKD 3 billion.
HKD 5,500,000,000
Anthony?
Hi, Ronnie. How fungible would you describe the other centers in the pipeline, including Center 66? Also, do you expect similar high single-digit yield to be delivered by Center 66 and other centers in your pipeline?
First of all, maybe because I'm born short and ugly, I want to make sure that my projects, which the latter is totally under my control, are all Brad Pitts or whatever you like. Okay? If I don't find a place that is among the tops in a city, which immediately limits its fungibility, I don't even do it. Don't touch it. So you must control some of the best locations, and every project of ours is in that category for sure. Otherwise, you would be too proud to think that with somebody my size, I can play basketball. You got to be kidding me. Who the hell you are, right? If you don't have a good location and you think that you can be a world-class shopping center, who are you?
Other people can build pretty reasonable too, and sooner or later, they will learn to design well too. Although so far, not too many, but sooner or later, they will come. It would be really too proud to think that you can have a secondary location, and yet can occupy a position of dominance or relative dominance in the city. We always choose our sites very carefully. Give you one example. The Wuhan site. It is right on Jianghan Dajie, Jianghan Street. Right across the street are the three top shopping centers existing in the city. Just that, in our opinion, they are really poorly designed. That gave us the chance to have almost as good a location. Certainly not a Ronnie Chan, maybe not a Brad Pitt, but I do not know, Robert Redford or somebody. Then you are in the game.
Because they have, in our opinion, some genetics that are really ridiculous, such as design, ridiculous. That gives us the opportunity to come in with a better design and almost as good a location. Then when you put all these factors together, yeah, we will win. As far as return is concerned, I always tell people that we aim at 4%-5%. Do not get carried away with the fact that Parc 66 in Jinan has a 7.9 initial yield, Forum 66 has nine initial yield, but do not forget, Palace 66 has only got a four to begin with. We are still working out the problems there. I do not want to give false hope to investors.
Moreover, we also tell all our investors and potential investors, remind them that the office element, if it exists, in no way will it bring the same kind of return as a well-designed shopping center. However, just in the last day or two, I have been reviewing some of the figures that H.C. provided, some historic figures. The opening of an office tower in Plaza 66 or in Grand Gateway boosted the footfall and hence revenue sales of the shopping center, which then translates to rent for us. It is quite obvious. It is not a money loser. It is not a loss leader. It is just a lower yield product type, which has its attraction, such as much easier to manage, much more stable tenant, much less need to mix and match tenant with tenant, vis-a-vis the shopping centers. It has its benefit as well.
You do have a lower yield. One of the advantages of having that office tower, say, is that it really enhances the footfall and hence sales, retail sales of the shopping center downstairs. You have to take it as a whole, the complex as a whole. If you can do a 7%, 8%, 9% for a shopping center and do a 4%, 5%, 6% for office, then you have a blended rate of, call it 6% or 6.5% initial yield. I think that is a very acceptable number for us because we believe, and our recent experience, not just that in the Shanghai of 10 years ago, but our more recent experience tend to support our belief that if we build the right thing and if we manage it properly, then rents will grow.
For example, when we opened Parc 66 in Jinan, the original margin was only 30%. Then it grew to 40-some percent, and last year it grew to 53%, and this year is 57%. By doing the right thing, by managing it well, you can really grow that rent in a pretty desirable way. First thing first, born right. I think that all our shopping centers are born right.
Another question. Sorry about that. With China slowing, is there a chance that the development cost budget can be revised down?
Can it be revised down?
I wish.
Let's not. We don't count on it.
Yeah.
We don't count on it. I think in the long run, it's wiser and it's more prudent to expect construction to remain fairly robust. Don't forget, the government is pumping a lot of money to do infrastructure development. And one way or the other, that does compete with us. I think if we can manage to lower the constructions, very good. But if not, let's make sure that we don't blow our budget.
Karen?
Hi, this is Karen Kwan from Maybank. I have two questions. First question is, with the Austin Station project slated to be launched in September, your competitors. Do you see a high likelihood of a relaunch of HarbourSide or Long Beach this year? And the second question is, can you give us a little bit more details in terms of rental per square foot, and also pre-leasing for Wuxi office? Thanks a lot.
Well, I would love to be able to predict what the market would be like the second half of this year for launching some of our residential properties in Hong Kong. Obviously, the market situation in the first half, as you have seen, has an impact on how much we would like to sell. Obviously, you know the results in Hong Kong. But we'll be watching windows of opportunity. If there are windows of opportunity surfacing, we'll maybe able to catch it.
You want to talk about Wuxi Office.
The Wuxi, as you know, the priority is to open the sequences, open the mall first, which, as Ronnie Chan said, will be open on 16th of September . I will just add that the rental situation is very much according to our plans and our strategy on how to play. I think we will be quite satisfied at this point in time on the progress so far. The office, actually, when you go and see the opening on 16th of September , will not be entirely covered by current mall yet. That is actually according to schedule. In fact, it is faster than schedule. By the end of the year, it will all be top-out, and we plan to open it actually the first quarter next year. There will be a phased opening. The marketing has been started.
The response, the inquiries and the interest so far is okay. Obviously, Wuxi is a very different market from some of the other places where we are now in. We have to look at the market situation and actually gauge the right tenants very carefully. We have phrased the approach. We will not be one-off, just let everything go at that point of view. We will try to optimize the rental income step by step.
[Tan]?
Yes. On Parc 66, I recall last year you mentioned that the 2% growth is due to the renovation work. Now the flagship store is already open. So in the first half, we see that you are growing 8% versus last year. If you are talking about just organic growth, stripping out those this year on the higher base, last year renovation work, what is the growth on the Parc 66 rental side?
You mean last year, or last six months, or what?
In the first half this year versus first half last year.
Oh, we don't have those numbers here somewhere. Go ahead. No, go ahead.
Sorry, can you repeat?
Yes. But some is due to, for example, the LV flagship store already open. So basically, maybe some of the pickup due to the full opening of the
Yeah. You asking about the year-on-year?
The year-on-year growth is 8%, if you get that out.
Okay. A similar period last year versus the year before last. Is that what you're looking for? That's about 2%.
2%?
Yeah. This year against last year, the same period, it is about 8%. That last year period compared to the year before last is about 2%. Am I getting the question correctly?
Last year, you mentioned that the 2% growth is quite slow versus prior year is 20%-something—
Well, yeah.
—is because of the renovation of Louis Vuitton.
That explains that, yeah.
On a like-for-like basis on other shops, what do you see in terms of the result?
Well, the aggregate obviously is the 8% you have seen. I mean, obviously, there is also the macro market situation, which I think we all appreciate. But the new stores, I mean, for example, the Louis Vuitton shop that is now open, is doing satisfactorily, I think.
Right. On the other hand, you have already run Forum 66 for more than six months. So in the past six months, what do you see in terms of the occupancy cost for Forum 66?
For Forum 66, actually, the occupancy cost in the way we define it, is relatively higher than some of the malls that have been there for a long time. For example, compared to Plaza or Grand Gateway. There are a few reasons. One is, of course, when you run a new mall, you often see the occupancy costs are relatively higher because they have to settle in, they have to get the right clients, and the customers have to accept the brand, and they have to test out the market and all that stuff. So we appreciate that.
The second reason we see is actually there are a lot of people who are very keen to establish the brand name, so they have extremely impressive facades. And in doing so, actually, it is very much a marketing orientation as well. For those people, I think they are very willing to pay higher rental. And I jokingly say, if you look at the vertical rent, it is actually a very good deal for them. And for them, actually, occupancy cost is not the number one priority or the number one consideration. Obviously, we want the occupancy cost to be lower for most of our tenants.
It will take a bit of time, as we have seen in other malls. Secondly, we are doing quite a few things to promote footfall and to do marketing activities. That is now going on. And I think the management at Forum 66 has also been strengthened. I am quite optimistic about the long term of Forum 66, although I must say that in the short term, obviously, there will be some adjustments and things like that, b ut I think in the long run, we don't see any problems there.
Since [Tan] is interested in some numbers, maybe I can supplement some concrete numbers. If you're talking about occupancy costs, roughly for Forum, it's around 30%. For Palace, it's more or less 30%. Parc is slightly lower, around 25%. Whereas Plaza would be somewhere around 16%, 17%. Grand Gateway is about 22%, 23% in that area. So you can see that those younger babies, actually, the occupancy cost is slightly on the high side, but gradually will come down fairly quickly.
I think one thing to note that for any brand-new shopping mall, from our experience, it's not unusual to have occupancy costs as high as something like 30% or slightly higher than 30%. If you look at Parc 66 as an example, when we first opened that mall, from memory, I think the initial occupancy cost is around 29% or 30% mark. Now it's been gradually coming down to something like 25%, right? As the mall is going through its gestation period, you expect to see that. Obviously, you cannot compare a brand-new mall with Plaza 66 and Grand Gateway, which has been running for over 10 years.
I think in our own positions, because of our own locations and the quality of our shopping malls, we tend to charge what we believe is the highest in the market. Even if it's not the highest, then we are able to command a premium. So at the beginning, then the higher occupancy cost, I don't think is such a big issue. We will work progressively as the mall is going through a gestation period. The tenants there can adjust to their own merchandise mix, that kind of things, with increased footfall to the shopping mall, then you see that coming down gradually, just like what we experienced with Parc 66.
To some extent, we expect to see the same at Palace 66 as well, despite the fact that we experienced a drop in occupancy during the first half of this year. That's intended because with the opening of Forum 66 now, we just want to reposition this mall and target at the younger type of consumers, right? I mean, there will be a period of some outgoing tenants and some moving-in tenants, and there is such a period that we expect to see a small decrease in occupancy. But by the end of this year, we expect that occupancy to come up again.
There is a question for the chairman. Do you think China's luxury spending is sustainable? If not, how does it affect the company's strategy to build luxury malls in second-tier cities?
Who is building the You mean we are building?
Yeah.
Oh, okay. Fine. First of all, look at all the neighboring countries with a more or less similar culture. Be it Japan, be it Korea, be it Taiwan. Well, it is not a country, but Hong Kong, not a country, but you know what I mean, as an economy. Somehow, Asians like brands. No question that because of the recent government policy, luxury brands have seen the sales come down. Which is not a bad thing because it means the society is hopefully a little bit cleaner, ethically speaking, which hopefully will make the society more sustainable.
You suffer a little bit in the short term in terms of rent growth. We still grew at 8% at Plaza 66, which is reasonable. Perhaps we were a little bit unrealistic. The market was unrealistically expecting China to go on forever and ever and ever, like in the last five, seven years, where luxury goods can do no wrong. On the other hand, neither should we go to the extreme and say that, "Hey, maybe there's not a market for it." No, I bet you there is. It still works. As far as the second-tier city is concerned, I think the growth potential there are even better than in the first-tier city in percentage terms.
Simply because in the old days, if you're in the secondary city, the only way you can buy the latest is to go to Shanghai, Beijing, Guangzhou or Hong Kong or Paris. But now, the major brands are opening huge stores in those so-called secondary cities. I cited Shenyang Forum 66. Cartier opened the biggest store in the whole northeast in our place. Chanel. Have you seen the Chanel store in Forum 66? Humongous. These are not dummies. They are smart people that do a lot of market research. I think the secondary cities should do well in the longer term for these luxury brands as well. One phenomenon, however, that one must be cognizant of, and that is in the last couple of years, everybody expects these top brands to open three, four, five stores in every city, it seems.
From brand operators that I've been talking to, owners, their strategy today is somewhat changed. Instead of opening four in a city, say, they will only open two. The question is, are you one of the first two? Are you one of the second two? That goes to Anthony's earlier question. If you are genetically born right, that's how you can assure that you are one of the two. When it's one of four, two other people have a chance. When it's only one of two will be gone. We make sure that we are one of the two, and history shows that we're always one of the two.
In some cases, very top brands are moving out of other places to move into our shopping centers, recognizing that if they don't come now, they may have a problem finding space in the future. That was some of the experience in Plaza 66. They don't want to repeat the same mistake in, say, Forum 66 or Center 66. They're actually moving into our shopping centers. When it's one in four, although the first one and the second, the differential in sales from the research that I've seen is quite stark. The number one does a lot more business than the second. The second probably do a lot more business than the third and the fourth.
So it is not equally divided, 25%, 25%, 25%, 25%. Nonetheless, when it's one in two, the last two, all the sales will go to the one and two. So it is a phenomenon that frankly, we welcome. Because we have confidence that our product is right there. So we will be one of two. For other people, it may be a sad news. For us, it's a great news because it's less people to divide the pie. These are just changes that are happening in the secondary cities that we have been observing, and we like it.
There are two questions here. One is about selling, one is about buying. Do you plan to sell more investment properties in Hong Kong? Whether you have plans to buy new assets in China?
Well, as I wrote six months ago, we are not immediately planning anything for further disposal of mature investment properties in Hong Kong. We sold, what, HKD 5 billion, HKD 6 billion?
HKD 6 billion.
Last year. Over HKD 6 billion last year. That's about all we want to sell. The better located, higher traffic, higher yielding property, we don't want to sell. We have no intention to retreat from Hong Kong. We sold what we want to sell, and it's good that we sold it at that time. Try to do it today. There's no way you can do it today. We're fortunate to have sold it a year ago at very good price at, what, a CapEx of roughly HKD 5 billion, and sometimes even better than a HKD 5 billion, such as HKD 3 billion. We have no plan to sell any more in the near future. In terms of buying, if something is cheap enough, yeah, I may be tempted. I told the board that this morning.
If it is cheap enough. On the other hand, let us also be cognizant of the humongous capital expenditure that we're staring at. Financially, we're as strong as anybody in the business relative to the size of our new projects. We have been debt-free for seven years almost. Only last month did we have a 0.3% gearing ratio, which is nothing. Nonetheless, looking ahead, roughly you're talking about HKD 6 billion per year for a number of years. Let us not get carried away by expansion. Make sure that our finances are well. After all, I don't think that we're going to be able to sell Hong Kong completed apartments en masse in the near future. The chance exists, but I don't think the probability is particularly high. We're sitting on what?
HKD 20 billion, somewhere between HKD 20 billion and HKD 25 billion of completed buildings unsold. If we sell some of them, it will help our financial situation. Now, it sounds crazy. Somebody who's talking about a 0.3% gearing ratio saying that something will help. There's a lot more to come. We are very comfortable. We recognize that. Because, if the bottom fall off the market, say, you can always stop construction, can't you? The process is controlled by us. We have the latitude to do what is appropriate according to the market and according to our own financial position. We are in a very good position, but still, let's not be too brave and extend ourselves too much. Having said that, I'm a sucker.
Give me a real good deal, and I'll really think twice, and I may need Philip and H.C. to hold on to the record, the thing that the horse you biter. The bit. He's a steward of The Hong Kong Jockey Club. Let me tell you, in the last couple of years, previously with Nelson, now with Chen and H.C., sometimes I need the bit to keep me from acting. But hey, that's a balance that is healthy in any organization. We'll see. Having said that, let me add one thing. That is, in the long term, won't you agree with me if I were to take a vote right now that if you were to take a five-year, three, five, seven-year view, that land costs in mainland China will continue to rise? Especially the top located stuff. Just like New York City.
New York City, if you were to invest in the United States in commercial property, New York is the best city. Right? If you invested anywhere between 42nd and, God, 68th or 70th. Well, not quite. Say 60 some. If you invested there between Fifth Avenue and Park with Madison in between, you are okay. In fact, when the market is good, they rises the most. China is growing at a much faster pace than New York. I think in the long run land costs will tend to go up, especially the good located ones. So we are cognizant of that as well when we consider whether we should buy at a particular time or not.
May I supplement one point we made about the selling of the non-core properties last year. It not only helped us to recycle the capital out, but it also helped us to refine our Hong Kong portfolio further. You can see from this first half result about the rental growth coming out of our Hong Kong properties, those that are remaining and continuing. We achieved 11% rental growth for market in Hong Kong under the current economic climate. By doing it last year, the management team now can be a lot more focused on enhancing the performance of our Hong Kong portfolio further.
Hi, it is Eugene from UBS. Just got a few questions. First, are you starting to renew some of the leases in Parc 66 in Jinan, and what sort of reversion rates are you talking about in the potential renewals? Since you mentioned that you usually charge a premium in the market, the premium in terms of the rents, do you think that it has already captured the future potential sales growth in these shopping malls in the second rental renewal cycle? My other questions are more on the numbers. First, what is your expected yield on cost for Wuxi? Second, what is your cap rate assumptions for China and Hong Kong investment properties, and have you made any changes in the past six months? Thank you.
For the first question, I think we are in the middle of actually reviewing some of the first-round tenancy agreements after two years of opening at Jinan. Situation is okay at this point in time. We have not really gone through the entire exercise yet, so I cannot really give you a very precise answer to that question. I think at the moment the signs are okay. It is a very big mall. It is 171,000 sq m. So the tenancy mix actually needs a little bit of careful planning. Having said that, there is one situation we also noticed, and that is when we opened, a lot of big brands are saying, "Jinan? Well, where is Jinan?" I am exaggerating a bit, but that was actually one question I got from one brand.
Now they say, "Wow, we want to get there." Some of them actually are now very keen to come back to really look at Jinan. We are actually talking to some of these people, and it is my intention, if we do not get them, because we are not really renewing everything, 171,000 sq m in one go, after two years of opening. If we do not get the ideal brands this time, we will get them next time. If you give this mall another few years and you look at then, few years later to today, you will see the quality of brands and the tenant mix will be improved. That is the intention.
The other question is about the yield of Center 66.
Around the 8% mark for first year. Yeah.
Center 66?
Yeah. I always like to underpromise. I have a number here. I know what it is, but I prefer to give you a lower number. I think we can easily achieve HKD 6.5 billion. Easily.
The hurdle rate of Suha, that is not the right term, but the target rate that we actually are aiming at for every single new mall that is going to be open would be about 4%-5%, 4%-ish. But I think it is our intention to surpass it every time that we open a new mall. I think we see absolutely no problem in surpassing that target rate. You got to recall, that was the rate, actually, that Plaza 66 opened over a decade ago.
Eugene's last question was about the cap rate deployed for Hong Kong and China asset. Can H.C.?
This year, when we had the evaluation meeting with our independent valuers, we proactively raised one question, is there a need to increase the cap rate in view of the possible rise in interest rate? The valuer gave us a general answer, yes. Having said that, the valuer also said that considering the very conservative cap rates they have been using, adopted by Hang Lung, there is no real need to change the cap rate this year.
Having said that, for China, for our shopping malls in Shanghai, we use a cap rate of something like 7.5%, 7.75%, and they regard that as pretty conservative considering the quality of our buildings. For the newer ones, they consider a cap rate of 8% is reasonable. Unless there is a sudden rise in interest rate for a sustainable period of time, I personally do not expect to see a major change to the cap rate.
No. Same as before. Hong Kong, again, there's no change in the cap rate. But generally for retail and commercial area, it's in the vicinity of 4.5%-5%. For offices, it's around 6%-6.5%. I think that's quite in line with the market, in fact, it's slightly on the high side, compared to the quality of our buildings. Again, our valuation is pretty conservative. And that's demonstrated in our last year's disposal of Long Court properties. We managed to sell it at over 40% or 50% of the book value or the fair value or whatever you call it
The worst of our stock. So far. 4.5%.
Yeah.
Hi, it's Kie Jang from Macquarie. Just a couple questions. Since you're not selling residential properties in Hong Kong nor the investment properties, non-core investment properties, and your gearing is 0.3%, what's your comfortable gearing level in the next three years? Could you also remind us your CapEx for the next few years? Is it evenly distributed HKD 6 billion every year for the next few years, or you have one year of going to over HKD 10 billion like this year, nearly HKD 10 billion this year? Another question is, could you please give us a breakdown of the rental income in first half for Parc, Palace, and Forum, and also their current margin level? You mentioned the Parc 66 margin is 57%. Thank you.
We expect that our gearing shall increase by about 4%-5% per year from now on. Given our CapEx program, we have been saying that, I think, for a couple of years now. We feel totally comfortable with a gearing of 20% or the same in five years' time after building out a number of shopping malls from now on. Your next question is—
The assumption there is that we do not sell anything.
Correct.
Right? There is no rise in rent, which is unrealistic, right?
Also redistribute all our leasing profit activity, which we certainly do that, particularly with rising rental income now every time we open up new properties in China. Okay, so it is a very conservative.
Including the fact, on the spending side, you're going full speed.
Yeah.
Right? You're spending all the CapEx. You said, "Okay, I mean, HKD 5 billion-HKD 6 billion a year. Let's go for it.
Yes.
At full speed.
Yes.
All these are assumptions, b ut what I see is telling you that even if that is the case, i.e., we don't have any trading income, the rental income is not really growing, and we're going full speed, we can feel happily and comfortably.
And bear in mind, by spending HKD 6 billion each year for the next five years, what that means is by the end of that five years, we would be adding 12 million sq ft of high-quality commercial leasable GFA area to our portfolio, right? So you can't just look at the CapEx figure alone. So when I gave you the 4%-5% increase in our gearing ratio each year, again, it's a very conservative estimate.
That is the CFO's drop-dead scenario that everything start moving. As a businessman, I'd be happy to bet that the likelihood of getting there is to be questioned, shall I say.
Kwok Tang about the rental income, right?
Yes, the margins.
About the margins.
Forum is about 61.% Parc is 57%, as mentioned. Palace is terrible. It dropped because of the changing of tenants. We have people moving out, people moving in. There is a gap time and hence the occupancy rate also dropped, and it dropped to 87%, 88%. Although by the end of this year, it should be back up to 92%, 93%. Because a lot of them are contracted already, just the physical logistic to move out, move in. The interesting thing there is that the actual sales went up. Although occupancy rate went down because of tenant remixing. The actual sales grew by 2%. By the way, the roadwork has not been finished. We are hopeful that it will finish soon. I have the photographic image that I will show to you after this. That was taken yesterday.
August 31st is the Quanguo Yundonghui, the Chinese National Athletic Games in Shenyang or in Liaoning Province, but the key one is in Shenyang. We think that they will complete the work before that time. Having said that, I will believe it when I see it. Because the difficulty is not just in Zhongjie, which is the pedestrian street in front. Even at the back. They narrow the street because of construction work, and so they have not finished covering them up yet. I have a photograph to prove it to you. It is something that we are working very hard to work it out, and hence, a temporary fall in the margin. For Shanghai, it is gone through the roof. It is gone up further. I think it is 86% in Plaza 66. Was it?
87%.
81% to 82% in Grand Gateway. But the amazing thing is this. When you take the whole Mainland China properties as a whole, with three of the five properties being new. One of them is Palace 66. It is a place that we still have to work it out. The average margin is 79%. The average for the marketplace in mainland China, according to our research, is around 66%-67%. The mature ones, we are getting to call it 82%, 83%, 84%. Call it 83%. If the mature property is getting 83%, other people are getting 67%. For every HKD 1 00 of rent you receive, think about it. You are getting HKD 16 more into your pocket. That is a very significant amount. RMB 16% higher for every HKD 100 of rent. The blended rate is
279. That will obviously come down as more and more new properties are added, and it takes time for them to ramp up. As I mentioned, even as good a shopping center as Parc 66, it started at roughly 30%, then it go to 47%, then 53%, and then now 57%. It takes some time. Another point that you should be cognizant of on rental margin is the following. Some of the shopping centers are humongous. For those humongous shopping centers, you cannot have high paying rents, every shop. You are going to have some ice skating rink or more restaurants, cinema, whatever, which are lower unit rent. In a bigger shopping center, you do not usually do as well in some of those measures, because the average rent is going to be that high. Parc 66 is only 550,000 sq ft.
You can have very high numbers. Grand Gateway does very well, too. Grand Gateway is 1.3 million sq ft, but it still was able to bring up the rent and hence the rental margin and all that stuff. But it is hard work over a long period of time. I put in a word of caution not to expect it to get there overnight. It will take some time to work, to improve a mall for the rental margin to rise.
Okay. We can take two more questions. Amy?
Amy Luk from J.P. Morgan. Got a few questions on the numbers. First of all, it is about Forum 66 occupancy. Since the opening was 100%, but in your latest presentation, slightly dropping to 98%. Is that any particular tenant that is not doing the right thing in your mall that let go or any particular reason? The second question is about Grand Gateway, where the rental income for this first half was around 7%. But as far as we understand, there are some higher-end shops open in Grand Gateway last year. Is there any segment that is slowing down that caused the growth that is going to the single digit? My third question is, could you give us a breakdown for each of the second tier malls year-on-year growth in terms of the rental income? Because here we got a blended number. Thanks.
I think Forum 66, I think we opened at about 100%. But actually, there are a few shops which obviously did not really quite fit, and now that they opened, customers don't really walk in. There's a cake shop, and incidentally, it's called Black Swan. It's now gone.
Thank God.
After several months, we are already adjusting some of the really non-performing shops and some of the lease people, and there are one or two changes. I would say that actually, we would expect to be more aggressive in actually managing, proactive in managing the tenant mix going forward. 100% is not really the number one target that we must meet, but actually the quality of income and the optimization of tenant mix is the thing that we should be looking for.
Lower occupancy rate. Don't assume that somebody is leaving. Sometimes it's because we ask somebody to leave. The departure can work both ways, can be voluntary, can be involuntary. Can be initiated by the tenant. Oftentimes can be initiated by us recognizing that, hey, this thing is not going to survive here or it doesn't fit here. We ask them to leave. Having a little bit of vacancy is a very natural thing. There's no question that is inevitable that every new center, we're just not smart enough to get it right the first time. There are going to bound to be some misfits. Some people can't do business there, so either they leave or ask them to leave. We have to bring other people in. You're going to have challenges, as I said earlier. Grand Gateway.
What was the question about Grand Gateway?
Yeah. Grand Gateway. You want to answer that one? Well, as I said, slowdown is an overall fact and reality. That was my first statement. Once I opened my mouth, it is slowing down. Eighteen months ago, we saw it, and it's gotten worse. In that light, to be able to have a shopping center do 7% or 8%, such as in Shanghai, the two properties, actually is rather pleasing. People know that the high-end shopping centers don't usually. Well, has been hurt some more. I was surprised that today, who was it? Somebody mentioned something. One of our colleagues was mentioning that actually the gold stores in China is doing quite well. I'm surprised. I don't know why. I have to look deeper into that. Lowering of gold prices or whatever, so people are coming out to buy and that kind of a thing.
There are anomalies to the general trend, but the general trend is no question it is slowing. Frankly, I don't know when it's going to pick up. I have no idea when it's going to pick up. As you all know, as a bear hugger, I feel very comfortable in a bear market. In Chinese, I told the journalist earlier that. They said, "How do you describe the market today in one word?" I said, "Winter." Then later I said, "I don't know when it's deep winter." It may get worse before it gets better. You just have to brace for it. Financially, we're so strong, we have no problem. Operationally when some of the weaker players will not be able to withstand the winter. It's just survival of the fittest in the business jungle.
We may have to keep changing some of the tenants until we hopefully get a more optimal one. Even the optimal one is only for a certain period of time, maybe five years later, three years later, that which is optimal once may not be optimal anymore, so you have to change again. Such is the nature of business. That's why even in ordinary times, what, 15%, 20% of the shops in a normal shopping center would have changeover every year. What's the big deal? You begin to worry when nobody is talking to you about renting a new space, then you begin to worry. That's not the case with us yet, and let's hope that it won't come. I don't foresee it.
Amy also asked for the breakdown in terms of rental income. Forum, we got HKD 138 million for the first six months. Since we only opened Forum in last September, you do not have a really. But on average per day basis, actually, there was a 3% up in terms of rental income. For Parc 66, the rental income was HKD 189 million, which was 6% higher year-on-year. Plaza 66, rental income was HKD 75 million, which was a drop of 9% year-on-year.
Maybe it is wrong.
We can take last question. John?
Thank you. John Chan from Standard Chartered. Two or three questions. First question, could you just give us a sense of the underlying retail sales trends at the shopping malls in China? Second question relates to what you said earlier, Ronnie, that you have been tempted by a few sites in China, but you have held back. What is your sense in terms of the availability of these prime strategic sites in cities that you are not currently in? At this time, maybe a third question related to what H.C. said about what I thought was a pretty good rental growth in the Hong Kong portfolio. Was it mainly natural reversion or as H.C. said, you sold some of your non-core assets that were underperforming or was it, again, due to just more active management? Thank you.
If I just answer the last one first about the Hong Kong portfolio. I think it is a combination of both. We see a double-digit reversions of our existing properties in Hong Kong, the retail properties as well as the offices. At the same time, we have been doing some renovation work of some of our core properties in Hong Kong, and that also helps the positive reversions. Of course, for those non-core properties that we parted with last year, those are the less performing ones. So all these factors added together and deliver the 11% rental increase for continuing properties.
The second question I will take. The first question I forgot, so I will let Philip take that. As you know, I never sleep the day before the Board meeting. I am sorry. This and that. Mainly, I have to write the chairman's letter and that sort of occupies me.
John asked about the retail sales trend.
Yeah. I know the second one. But I will leave that one to Philip. The second one is about opportunities to buy. Let us take a look at Wuhan. We have been working on Wuhan now for seven, eight years, and who would imagine that a good site like this one would become available and clearance is done. Now, that is a big thing these days. Ten years ago, eight years ago, if they do not clear it, if they promised you they will clear it, most likely they will succeed. But nowadays, even the government, if they promise you think twice before you agree, right? So being able to have a land that is totally clear is very important. And this one is, I think my staff told me yesterday, "It is all gone." I think he is right. Okay. But whatever it is.
So it shows that there are still, in good cities, and Wuhan, by the way, is a- retail is a very strong city. I know of one or two department stores that claim to have about RMB 3 billion sales, retail dollars. It is a great city, and we were able to find a new location. Let me give you just one more sentence of background. That street in front of us is the division between two districts. This side never developed. Now the government, well, not now, but in the last two or three years, had a big plan to redevelop this side of the [Non-English content] all the way to the river. We don't want to be on the riverside. Never. When you're in shopping centers, don't ever come close to water. People don't swim to your place.
You want to make sure that people walk in from all four sides. Anyway. This new plan of the city to be executed by the district, and they are hungry because this district have never seen major projects. Although they are right across the street from three of the best shopping centers, well, best in the sense of dollar sales, but lousy- anyway, three or four of them, actually. Right next to it, and they never get the benefit of it. Now they have a chance. They have, by the way, borrow a lot of money to clear. The stars just align and bingo, we pick it up. It's a complicated deal, as I said, 600. Well, I didn't say it to you guys then. It was a very complicated deal. Suffice to say that they need us.
They want us as much as we want them. We can always say no and walk away. You know that Hang Lung has the ability to do that. We just don't tell you how many deals we have walked away from. We only tell you the deals that we do. We don't tell you the deals that we bank. They need us, and so they have incentive to work with us. We pick up a great deal, which by the way, effectively is what it is. If we do things right, we can really make it even cheaper, so to speak. There are such opportunities, and we have been still working on a couple of cities that have been brewing.
Sometimes they're in the back burner, and then suddenly a new mayor comes to bring them to the front burner, and then turn out to end up in nothing. You put it back on the back burner and I mean, "Oh, man." I mean, the process is tedious, and we have seen some deals that have gone front and back a couple of times. Some of them never materialize. Others, bingo. You got it. So, yeah, there are. If I have my wit and judges, and if somebody can give me some free money, I may be able to pick up one or two good deals for you. But negotiation is still a ways off, so you never know whether it will materialize or not. If I succeed, you know about it. If I don't succeed, you never know about it.
Okay, we have a last question here. It's about the dividend policy. Any change in terms of policy?
We've been saying that we maintain a stable progressive growth in dividend. You see that during the financial crisis time, we didn't reduce our dividend at all. Even though when we had property sales or without property sales, we maintained the same dividend policy.
The last part of this question, that's the retail figures.
Oh, yeah.
Yeah, retail figures of all the cities. In fact, this morning, our colleague just presented to us some of the figures of the cities in China. Actually, I always take that with a large pinch of salt. Because if you look at the figures, they include the buying of toothpaste and toothbrushes, and that is not really what the market we are into. But we rely on our own intelligence, and I think generally we compare quite favorably. I mean, obviously, Hang Lung insists on announcing our results within the first month of the period end. We are normally, I think we are always the first company to announce our results.
So we do not have that benchmarking from other companies, but I think when you see the other figures, I am actually thinking that we ask our tenants as well on how they compare. If they have multiple shops in the same city, how their shop in Hang Lung compares to others. We get that information as well. But retail figures are available everywhere. Retail figures in China, that is. I am not too, I think we say, totally dependent on those figures to compare our own benchmark against our own performance.
Once again.
Nevertheless, the trend is moving in the wrong direction. I remember two years ago, it was 27%. Last year was 20.7%. This year, according to our colleague this morning, it was 4.7%, I think it was.
That is correct.
In general, it's slowing down. That much we know.
Luckily, down to it.
Right.
Once again, thank you very much.