Okay, thank you all for coming to Hysan Development's 2018 annual results announcement session. Let me introduce our panel for this afternoon, our Chairman, Ms. Irene Lee, our Chief Operating Officer, Mr. Ricky Lui, and our Chief Financial Officer, Mr. Roger Hao. We will start today's session with a presentation from Irene, Ricky, and Roger, and we will follow that with time to take some questions from the floor, as we will have a live webcast today. We will also be taking questions online. But before that, I will invite Irene to start. Irene, please.
Thank you. Firstly, let me wish everyone a happy, healthy, energetic, prosperous year of the pig. I hope that we will all do very well this year. Welcome to our annual results. Thank you very much for coming. We saw the collage back there. I want to open by saying that our roots, just to remind everybody, can be traced back with the purchase of East Point Hill back in 1923 by my grandfather, Lee Hysan.
We just celebrated 95 years. Of course, it is now Lee Gardens, and we are sitting on this piece of land, which used to be a hill. The ensuing 95 years have seen the transformation of the area from an entertainment park with cultural elements to now a vibrant lifestyle destination. We actually haven't ventured very far from our roots. It's still entertainment, lifestyle with cultural elements. Our much followed social media hit, Hysan95, I hope you all have it on your phone. It's on Instagram and Facebook. It has 95 stories. It's actually a wonderful celebration, a way to celebrate our past. It's all people, 95 stories about people. Actually, there are a few dogs, Mark. I think there were at least two dogs.
It's really a human story, and it gives you a very good feel for who has lived here, who has connections here, and it's very much from the heart. In 2018, of course, we celebrated Hysan's long-term link with Lee Gardens and our determination to grow our home base into Hong Kong's best district to work, live, and play. This is how it all started, as a work, live, and play area.
Our mission is to create a community for all ages. Now, let's have a look at a few numbers. We all get terribly excited about that, but I think Roger will give us more details. Turnover and recurring underlying profit increased by 9.6% and 8% respectively, year-on-year. Increased reported profit reflected changes in fair value of investment properties. Occupancies of retail and office portfolios were 98% and 97% respectively.
Let's look at the Hong Kong economy and retail sales in 2018. Not a lot of surprises. I'm sure you've heard it all. Economic growth slowed moderately in the second half of 2018 with the impact of global macro issues. You remember that 2017, towards the end of 2017, we really saw light at the end of a tunnel. We all got quite excited, and it went straight into 2018. The first half was very positive.
Towards the second half, things started to lose a little bit of luster. Residential property market and the stock market were less bullish in the second half. Since you know, this actually dents the confidence in the market. However, retail sales saw a robust growth, very much robust growth in the first half of 2018. It slowed in 2018 second half.
As for Hysan, our estimated retail sales growth outperformed Hong Kong's retail sales growth by quite a margin. Office rental reversion was robust and occupancy improved. Market challenges persist, from macro issues to structural changes in our tenants and our customers' demands. We've talked about that quite a lot in our previous sessions, so I'll still touch on those. So a few pictures.
This is really a recap of how we see the macro. You see the boxes. We focus very much on structural changes. Yes, of course, we have interest rate hike, we have China war, we have our digital IT stuff. The key issues we have to focus on are generational shift. The baby boomers are basically phasing out, and in comes the millennials. Even the millennials are phasing out. In comes the younger crowd, XYZ. They have very different aspirations, very different behavior.
Of course, the demographic shift is very important. We focus on that a lot as well. Traditionally, as you know, Lee Gardens is very much a local Hong Kong, loyal customers, south side. This is the place that generations, they have loved this area. We find that with the migrants, people who've been here, who've lived here, they're actually Hong Kong residents.
They've been here 10 years, 15 years, and I'm really talking about a lot of the China-based people. They actually live here. They actually have Hong Kong ID. Their kids go to school here. They're Hong Kong. We find that increasingly, their spending pattern and their ability to spend is outstripping the locals. So we need to understand their behavior, and we need to also welcome them and cater to them. Now, the good news is there's still plenty of liquidity.
Hong Kong's economy continues to be robust with low unemployment and the relatively benign interest rate environment, particularly with Jerome Powell declaring that in the U.S., rates won't be rising too much. The local market is good. Now have a look at retail. Retail and office actually are quite similar. Retail was first off its mark to tell us something is changing. Things are going on which will actually undermine how we look at retail business.
So really, it's definitely fast and determined. I always go fast, I always go determined. Why fast? It changes every day. So don't get your eye off the ball. Fast and determined pivot to experiential office with strong digital journey. Now, easier said than done. These are very, very big words. Experiential office, strong digital journey. Then, of course, we just talked about the demographics. New Hong Kong. What are they?
How do they look at spending? What are their aspirations? How do they look at their kids' education, their kids' spending? How do they want to live? New classic. What is new classic? We've always been famous, and actually a little bit mistakenly, thinking that Lee Gardens is just classic, as in high-end luxury classic. We're actually a very, very balanced portfolio. But even in the balanced portfolio, we look at new classic.
New classic is actually health and wellness and children. What do people want to spend money on? Instead of waiting and saving money for their first Hermès croc bag. People don't want that anymore, sadly. I might still want one. I know Sarah does. And 10 Chanel handbags, still not enough. But today's younger generation, they have different aspirations.
They go for health and wellness and education, spending money on their children, spending money on healthy, safe food, traveling, having new experiences. For instance, I suggested all of you try a Singleton sensorium. It's not a solarium, it's a sensorium, where you actually experience being in Scotland. You have the wind blowing, you smell, and you actually sample very interesting whiskey. It's a pop-up.
So with big demand, we've been popping it for a bit longer than we thought. So for office, it used to be our steady Eddie. It used to be we'll continue to ride along with GDP. But also, we are finding a very, very big structural change. There is definitely a fast and determined, again, fast and determined pivot to flex, to co-work. Again, this is a generational shift. The younger generation may not want to work the same way we used to work.
They really don't treasure having the big office with a plant and the window. They want to have flexibility. They don't want to commit to having this space in this area. And employers also, they look at fixed cost. In the past, when we had two floors, when we wanted to get to new premises, we would say, "Oh, let's go for another half a floor just in case we expand."
Now, space audit is a new area, and I suggest for young people, if you want to have a new career, space audit is a good one. So people look at their space and go, "Okay, instead of two floors, can I do so with one floor? And where are the other possibilities? Do I have two co-work spaces and flex space above and beyond or across the road?
Because then if I have a due diligence team come in, if I have a new deal, I flex into that space, and I do not have to worry about having 100 people or 50 people worry about. It is totally flexible. Flex space is important. You will see from our numbers that we have pivoted into it big time and very quickly. Lee Gardens Street. Some of you came to, I hope you did, to our opening party in November.
It was very, very special. We had four generations of the family help us celebrate. That was very, very special. It opened in November, but actually the OP was December of 2017, and our office and retail tenants have been moving in gradually during the whole year of 2018. What is Lee Gardens Street? It is very, very special.
I think that there are very few buildings in the world, let alone Hong Kong, which has the courage to actually curate the entire building to be a lifestyle building. We looked at Lee Garden Three as our catalyst to demonstrate our commitment to lifestyle. It really is there to energize our portfolio as well, the rest of our portfolio. It really was meant to be there to further energize and zap into action the rest of our portfolio and commit to lifestyle. You will see amazing F&B, amazing children's products. I have never seen so many children's furniture stores, which are so much fun. Beautiful. A lot of homeware. It is definitely worth a visit. Of course, the F&B is very special. For those of you who have not queued up for four hours for A Happy Pancake, do so. Of course, the Starbucks Reserve is very, very popular.
Because of the 20 floors of new tenants, and we have actually specifically gone for a particular style type of tenants, which are a little bit different from our existing portfolio. We have actually recruited new blood. What are we doing? Why we must recruit new blood? We talked about new Hong Kong. We talked about how we actually need to cater to the tourists, the mainlanders coming in.
For the office crowd, the white collar, the biggest spenders, we need to also find new blood. Lee Garden Three, particularly with the banking and finance crowd, they actually want to have a little bit more drinking elements. Some of our restaurants, like Belgos, that has become hotspots. We need critical mass. We inject new blood, and new blood will bring their other friends from Central. Why do you want to sit in Central?
It is nothing new anymore. It is crowded, and at night it is not crowded. We are very alive in the evening. It is so much nicer to actually come here. A lot of you live on the South Side or actually, it is just a ride away. I think we see Lee Garden Three as a wonderful new canvas for us to promote our mix and to say we are committed to lifestyle. I have actually already talked about this because this is really We look at a portfolio. We talk about it all the time. We look at our portfolio, not in the old days, just as an old-fashioned landlord. We have one space ready for our tenants, so we just look at that one space. Now, we do not look at one space or even one building. We look at the whole portfolio.
The other thing which is worth mentioning is increasingly, retail and office are seamless. We see them as powering and empowering. We just talked about how our new tenants from our office portfolio are actually inspiring us to look at curating different types of retail offering, and similarly, retail will tap into the office. For instance, we do a lot of our product launches in the co-work space. It is fantastic because co-work also brings, and I forgot to mention that apart from the financial institutions, co-work or flex space brings in a transient dynamic traffic. We have end to end. We have pretty young, cheaper, more startup style of co-work in called theDesk, which is in Leighton Centre and in One Hysan Avenue, all the way to WeWork is moving in soon. Both bookends, you will see different types of demographic.
Because it is more of a transient traffic, you will see different types of people, different exposure, and they will bring different friends who will talk about it. It is very important to keep energizing and keep bringing in this fresh blood. What else do we do to make sure the stickiness is there? Loyalty programs are very important. Loyalty clubs. Now you have all heard about our Club Avenue. We are 13 years into Club Avenue. That is a very high-end, big-spending, invitation-only loyalty club. However, in the last year, we have pushed on a more of a mass program in earnest. We have always had Lee Gardens Plus when we used to give that to our office tenants. It was something that they feel they belong to this area. They have office pushed to them, e.g., in a Starbucks, 55%.
But not as inclusive, nor was it a concerted effort to collect data. Now we have launched Lee Gardens Plus with a very ambitious program to really build a platform. This is our data collection, and it coincides with us launching our area-wide video speed Wi-Fi. That was launched in November, right? That became our funnel. The funnel just opened, so that when you come into the area. Now it is in and out of more, so it does not cut you off, which is fantastic. If you come in, you see a thing I am on. If you do not sign up and you say, "Oh, it is too hard to put my name or my telephone down," then you will have, I think half an hour. Is not it, Roger? Half an hour?
Half an hour.
Half an hour. If you sign up, which isn't too painful, you get six hours?
six hours.
6 hours. If you're Club Avenue, you get 24 hours. It's amazing how much value people put on that. We know our loyalty customers. What do they value? They value parking, they value Wi-Fi. These are two very common things that they love. With the introduction of Lee Garden Three, we now have 900 parking spots. That is incredible. With a very big number of EV spots in LG3 as well.
This is really trying to mobilize another group of people, and we're building a platform. A platform with the traffic we have coming through the MTR is going to give us a very good database. Can you imagine if somebody, Nike, wants to launch some special shoe? We also have the ability, because we have cameras, to tell where people gather, sex, and age.
Not precisely, you're 31 and a half, but we know. You can imagine how targeted. It's all about targeting because marketing spend is a big amount of money, and if you can't target and you can't measure, it's money wasted. What are the other initiatives? We revamped our marketing team and our marketing program. I think I've got Tiffany here today. That's Tiff, right? She's been here. Meet Tiffany. She's been here for a year, and we have completely transformed our marketing. It's big budget.
But every single dollar, Tiffany can measure the leverage. We measure every dollar. Does it generate HKD 4? Does it generate HKD 14 for our tenants? And we do it for the tenants. To do that properly, Tiff's team have town halls. We have regular, at least biannual town halls, apart from regular visits. We actually try to understand what the tenants' needs are. What are their issues? What are their new product launches? What is their brand cycle? What can we do in our promotion to help push them? We also then do tailor-made things, and it's much more of a push and pull. In the past, the tenants would require us, "Oh, not enough traffic. Why don't you reduce the rent," or, "Why don't you give me marketing dollars?" Now we actually require them.
The only way you can require them to pitch in is if they see the result, and they do. So we have a very robust program with our marketing team, but most importantly, we actually have tenant relationships. Most people, and again, the old-fashioned landlord and tenant relationship is, I sign you up, and then hopefully I won't see you for 3 years when I renew your rent. Right?
And in the past it was easy because it was renew and raise the rent. It's not as easy now. You have to compete for the tenant. And the tenant have to know who is the best landlord, who is the one who can drive their business. For community, this is our big differentiator. You know that we have purposely curated a very eclectic mix. We have low-rise, high-rise, we have cultural things, we have street stuff, we have events.
And we try to inject all these elements to stimulate community engagement. Mark here is our Lee Gardens Association driver. We try to engage shop owners who may or may not be our tenants. So they participate. It doesn't cost them anything, but they get to know what events we have. And if, let's say, I'm just saying this, if we wanted to do a green month or green week, if we have relationship with them, we can actually paint the whole street green. Can you imagine how powerful that is? How Instagrammable that is. Digital. Gosh. Digital is a big, expensive, and fast-moving deal. All elements of our portfolio are woven together with this digital offering now. We have looked at our entire portfolio. We've just talked about our area Wi-Fi. We've talked about our. And we haven't talked about because we have actually launched e-coupons.
E-coupons is user-friendly, it's green, and it's very convenient. E-coupons in the past, if you buy something and you earn your coupon, it used to be a piece of paper that you put in your wallet that you may or may not remember to use. Now, it's on your phone. So increasingly, we're putting more and more things on the mobile, but it's still a roll-out.
We haven't rolled out to Club Avenue because these Chanel and Hermès-buying ladies may not want coupons on their phone, but it's going to be the case. We want to have electronic everything. And then, of course, you can hopefully book your restaurants, book your car space, so on and so forth. So increasingly, particularly with area wide Wi-Fi, we can do a lot of these things. And of course, we continue to improve our loyalty app.
Soon we will have one portal where you can actually say, "I'm a Club Avenue member. I'm a Lee Gardens Plus member." You can be both, by the way. You can then drop down and see what is on offer, and you get prompts. As we get more and more prompts, we will get to know them. We can proactively push ideas to them, and also have them engage in a virtual community as well.
But the acquisition cost will be high because for you to engage them, for you to understand their buying habits, you actually need some redemption goodies. Just having them register their telephone number, know their sex and age is not enough to know that they actually buy Chanel Beauty products, and then they go to Starbucks Reserve four days a week, et cetera.
We need to knit together virtual, physical, and visual community here. Am I blowing my trumpet here? It's a bit strong, I said Hysan success formula. We have a very dynamic. When I say dynamic, because now we have a very almost real-time tenant management information system. We are very much onto who is performing, whose occupancy cost is dropping for three months in a row, who we need to save, who is savable, who is not savable. We need to churn our tenants more actively, and we need to help them. If they do well, we do well. It's always our first thought. Targeted marketing efforts, we've talked about that. Loyalty clubs, I think in the numbers you've seen our Club Avenue numbers, and of course their spending power is strong. But very importantly, we are pushing our LG Plus very strongly.
We have very ambitious targets. All of them have very frightening KPIs. Every single event we will leverage to harvest names, harvest people who will sit on our loyalty club. We've also launched a loyalty program for visitors. In the past, it's primarily been a Hong Kong-based card. Now we have a Purple Card, which is for primarily PRC people. They feel part of the community, their stickiness, so when they go back, they say, "Ah, I still need 45 points to get my Starbucks coffee." It's a prompt. This is the stickiness. We have actually launched a specific PRC Purple Card to bring them in. Tight tenant partnerships, we talked about that. Rich community events, and community events can be NGO-based, could be marketing-based, could be tenants who haven't actually set up shop here but want to test the market.
Could be existing tenants wanting to test out some new concepts. We have done over 100 pop-ups last year. Everything from this wonderful sensorium, whiskey sensorium, to a one-day pop-up to our What is that called? The salted egg fish skin. I'm good. Very good with martini. We have variety. In order for our customers, for our shoppers to think, "Oh, on Saturday, I must come to Lee Gardens. Something's going to be new. I'm going to see something. My kids will have a storytelling." There's a drama session. We have a children's Is it once a month, Mark?
Once a month.
Show in Lee Garden Two and storytelling. All these come together in a way where people see this as an exciting, ever-changing. It is creative. We have to be creative. We have to fight for our share of business, and the way to do it is to actually come up with new things all the time. With all this happening, how do I make everybody accountable? You see our numbers. Our turnover has outperformed Hong Kong's retail figures two times, pretty much. Nearly two times. Our turnover rent this year from our tenants have outstripped our past many, many years. Probably it was the second highest, Roger, ever?
Yes.
To me, that is telling me something. To me, it is telling me that what we are doing is working despite a very, very competitive market environment. What are we doing about that? As a result, in our reversions, you saw that in our retail reversion, 2017 was a very tough year for us. It was -22% for retail, primarily due to a few big ones. 2017, with the big lower ones locked in, you really have to run fast on the spot to actually get yourself forward. 2017, we have actually almost broken even. Basically, it is a turnaround of nearly 25% in rental reversion. That is actually a very, very big deal for us. What we can say is, out of the 90-something rental renewals, the majority, I am talking about only with a handful of negatives, the majority have been positive. What have we done?
We worked very, very hard to lock in really good tenants with good positive rents in order to allow ourselves room for courageous and bold repositioning. Because it is a bit like, the bankers here would understand, short funding for long-term investments. We take a fairly painful hit now because the rent usually, if you bring in an F&B or experiential somebody versus a watch, a gold chain store, the rent is going to be different.
So you have a short hit, but you need to look at the lower rent but important and actually top-of-mind chosen new tenant, how that tenant is going to influence not just the neighbor, but the rest of your portfolio. You can only do that if you allow yourself enough positive rental reversion so you can deploy that to energize your portfolio, because that is for the long term.
You do not do that, you do not have a long-term business. We feel very strongly about that. Outlook, we do not talk about outlook very much. All I can say is it is far from clear. The market is unclear. With property and equity markets a little bit affected, people are a little bit less certain, so people are less willing to open their wallet. But for the right location, for the right mix, for the right offerings, people will still come. Very, very certain. People still have to get out of the house. People still will open their wallets.
Hysan has measures, therefore, to measure these uncertainties. We talked a lot about how we think about moving our portfolio dynamic to positioning. We have good community support. You come in here, you feel neighborhood, you feel community, and that is important. That is our differentiator, because we also are very lucky to be in a very concentrated area where I would say it has the richest tapestry of offerings. With that, we look forward to another successful year. This is not on script at all, so I hope you enjoyed that.
Thank you. Shall we have Roger?
Okay. I should be on script. Yes. Actually, in order to leave more time to the Q&A, and mindful of the fact that some of you may need to run to another meeting soon, and especially given the fact that the remaining part of our presentation from me and Ricky are primarily related to the announcement that is posted on the Exchange website, plus the fact that we are going to post this slide onto today.
Most of you have the book already, I think.
Yeah. Instead of going through the slide page by page, maybe I suggest me and Ricky just go for some of the salient points in our part.
We make it very short, so we allow time for more questions. Maybe that would be better. Yeah.
Yes. On my part, for the company as a whole, the numbers, as you already seen, the top line, around 10%, RUP, 8%, and then the reported profit primarily due to the valuation gain on the portfolio, which amounted to about HKD 3.4 billion, quite evenly spread between first half and the second half of the year. It ends up driving up the shareholders' funds, which primarily represented the investment property increase for the year. In terms of the proportion of the mix, as you can see from the next page, retail continued to account for around 50% of our revenue, and Ricky will give you a little more insight on that. On the overall treasury or financial positions, as you can see from the next slide, again, we continue to have a low gearing, strong credit rating, investment grade, and then a stable debt profile.
One additional point this year, though, is towards the end of last year, we have established a green finance framework. At the early part of 2019, we issued our first green bond through a private placement. Going forward, we expect that whenever we need to tape the financing of the finance market, we will probably go through the green channel as part of our overall initiative on the sustainability. Finally, one of the key figures for a lot of the modeling is the cap rate. As you can see, basically the cap rate remains the same as last year with this range of three sectors. That covers a very brief summary on the financials, and I will leave some of it back to the Q&A time. Maybe now, Ricky, do you mind-
Okay
I give a very-
Thank you, Roger and Irene.
All right.
I think Irene has put the story very clearly and very exciting and rich. Not much I need to supplement, but I just want you to turn to page 28. Just three pages, 28- 30. Actually, this is a very good example about how we curate our communities. Irene has mentioned about Lee Garden Three as a catalyst. This one, you guys can see all the good brands, both concept from Homeless, Sub-Zero to the very in and trendy WTAPS, mastermind JAPAN, F&B. We have the best interior award of 2018, John Anthony, A Happy Pancake, all this stuff. You see, just from this mix, give you a feel about, oh, this is really the kind of lifestyle stuff. We could stick to our position lifestyle, and you can see how the catalyst effects through the rest of the portfolio.
You see on the luxury sector, you have Chaumet, dunhill all come to the Lee Garden 1 and 2, and then even F&B, we introduce The Shanghai 1882. You see all the trend effect. Because of that, then we think with the bankers going to Lee Garden Three and all the lifestyle stuff here, are we going to give some more offering to kids? We get the Maggie & Rose from U.K., which is a very family-based activity members club. The trend within our portfolio happen like this. When you come to the page 30, we talk about Lee Gardens Association. We ripple that effect to the rest of the portfolio too. As we said, we are curating a community. With things happening in a meaningful portfolio, you're changing the tone of the area.
It bring in like a flagship store owned, run by their principal, not any dealers. That happen in Percival Street. And then the I.T put in the Carhartt WIP. And then we also have the 17 and 19, Yun Ping Road, which was the kind of workshop art and craft kind of building, one of the tong lau become that kind of destinations. You see the trend reaction. Maybe I just want to let you know or take it as an example, how we are curating our communities. Thank you.
Great. Thank you, Ricky. Now it is time for questions from the floor, and we appreciate it if you can let us know who you are and which company you represent. Please use the microphone when asking questions as they are going out live online. I will now hand it over to Irene, Ricky and Roger again.
I think we have stunned everyone.
Questions.
Go, go.
Oh. Thanks. Justin Kwok with Goldman Sachs. Perhaps two questions, one on the overall improvement in the footfall and the other one on the numbers. I think on the footfalls, I noticed the announcement that you have an 8% increase in footfall. So you mentioned a lot of these efforts in the association, all these things with the addition of the proptech and all these technology employed.
Can you share a bit more for the increase in the footfall? Would it be more coming in from the additional tenants or coming in from the youngsters or more affluent side of the Hong Kong Island? What extra people that you have attracted into your portfolio? The other question on the, obviously, numbers on the dividend. I think the recurring side of the dividend was growing at 8%. The dividend was slightly below that. So, how would investor be seeing this number?
Which kind of benchmark or the policy that you guys are holding? Thank you.
When I talk about the traffic, you can see, we find the traffic in general from Hong Kongers to visitors. As you see, the Purple Cards and also all this kind of Wi-Fi actually is very appealing to the PRC visitors. For the local, they will appreciate all the accent versus Maggie & Rose and all the content in the low rise and the Lee Garden Three, are really offering something you can find elsewhere in Hong Kong. So we find it is both attractive to both local and overseas, and the growth rate is more or less the same.
Maybe I will say two words about dividend. We tend to look at the payout ratio. So 60% this year, in the last few years, for us is a good number. In terms of the growth year-on-year, it is also a good number. We are a company which believes in steady progressive growth. So we have that in mind always as well.
Hi, this is Ken from Citi. I generally want to ask the question regarding the outlook for you that you have baked in for 2019. First of all is your projection for your rental reversion for office and retail part, as well as the second question is how do you see the retail sales? You have done a very great job, you mentioned, for last year. How do we do the forecast on the retail sales for your mall for this year?
Well, thanks, Ken. Maybe give you some numbers as a basis of reference. First of all, in terms of 2019, our expiry for the retail side is around 33%, so it's one-third. For office, it's about 30%, 3 0. In terms of the office expiring rent as I pointed out last year as well, the expiring rent, that is rent is coming to expire, is around 10%-15% higher than that of 2018. Having said that, as you see from the announcement and we mentioned that for the office portfolio, we managed to get a positive reversion. In fact, that is a double digit, high single to double digit reversion numbers. That basically reflect the spot rent momentum we are securing from, in particular, our Grade A offices.
Just for example, like for Hysan Place office with sea view, we are reaching the historical all-time high on a spot rent perspective. One more point is about the demand-supply equations. If you look at just the next 6-12 months, there isn't a lot of supply on Grade A offices on Hong Kong Island. Assuming the economy basically maintain in a relatively healthy situation, we have confidence that this year, 2019, we are going to get a positive reversion number for the portfolio for that particular part, 30 something percent.
Another thing I want to highlight is given our nature in terms of revenue, like at this juncture, about two months into the year, I think based on our high-level projections, we should have our revenue around 75%-80% locked in under contract, both from those lease that will continue for the year plus the in-contract part. Because of these two things for office side, we believe that we're aiming at quite a steady performance. On the retail, which is more complicated given the nature of the business, and again, with the slightly large negative reversion from '17, we managed to get to a more or less break-even situation in terms of reversions in '18. So that filled the hole from a recurring revenue stream point of view.
In 2019, at this moment, we believe that for those 30% that we need to deal with, overall, we should be able to maintain a neutral reversion situations. All in all, the retail revenue projection, again, I would say that that will be stable at this juncture. Any more questions?
Retail sales.
Oh, sorry. Before that, for retail sales, again, as Irene and Ricky Lui also pointed out, the momentum of this year-on-year positive sales growth slowdown similar to the whole of Hong Kong market. For our portfolio, first half of 2018 is 20% plus something increase year-on-year. Second half, Q3, Q4, it slowed down to something like teens and then single digit.
With the overall annual number, about 16%. For the very first month of this year, based on preliminary number we got up to date, we probably will see an overall high single digit or maybe touch on double digit positive growth with across the board positive contribution from all three hubs, like from Hysan Place, Lee Gardens, as well as Lee Theatre Plaza.
I guess one of the bright spots is obviously Hysan Place, which based on just preliminary number from January, we still get a +20% increase year-on-year. But mind you, normally because of the Chinese New Year effect, traditionally we'll at least wait until the end of the February numbers that comes in. So it may be too soon to say that things turn, but just based on the first month, it's not obviously the end of the world from a sales situation.
One thing we have mentioned previously is about the Hysan portfolio, both the luxury sectors and also the lifestyle sector have become very balanced. What we find is it become a very good balancing effect when sometimes people talk about watch and jewelries become difficult, then normally the other side will go up. This help us to have a more stable situation.
I think because the affordable sector is bigger, we need people therefore to stay longer because the number of times, the number of transactions need to go up. That is why we look at our customers, our shoppers, both from a vertical where we actually look at three generations. It is typically, the grandma can bring the grandchild to daycare or tutorials, joined by the mother and father sometimes during the day, and then the stretch of time. So to get the share of wallet, you need them to stay, you need the stickiness, and you need them to come back more. So this is what is absolutely very critical for us.
Okay. One more question here.
Thank you. It is Alvin from CLSA, and two questions. First one is on the retail side. So, in the next few years, will you see more or less tenant repositioning? Because I think it is a major factor that affect the retail rental reversion. How far are you from your optimal tenant mix? Shall we see the rental reversion to be in line with the retail sales growth maybe in 2020, 2021? Another question is on the office side. So you have around 10% co-working operators. So, just want to know more detail about them. How long is your lease with the co-working operator? How is their rental compared to other tenants? If they want to end the lease earlier, is there an annual penalty or is there any deposit they can take?
Because I think right now most, or if not all, are loss-making right now.
Yeah, I can see where you're coming from on that. I am sure Ricky has some interesting things to share with you. Just a word on the rental reversion stuff. Like what we tell you, for 2017, 2018 is a very good, interesting example. Like 2017, we had a few key, big contributor of the negative. For 2018, actually, for that particular space, why we have the negative is change in chain mix.
Right.
We are not just looking at that particular space, but the impact of the new tenant that we put in actually helps the rest of the portfolio, which is, I believe, part of the reasons why we can neutralize some of these negative reversion potential tenant from a particular sector because of whatever reasons. That is the beauty of doing that, as pointed out by Irene Lee as well. Because of this change, instead of selling one handbag with a few hundred thousand HKD, now the number of transaction need to go up to compensate that from a number perspective.
That is why we also see that apart from the traditional Lee Gardens luxury offering things, Hysan Place, plus Lee Theatre, actually, they now account for, I would say a majority of the. When I say majority, meaning like 65%, around two-third of the revenue coming from that part of the portfolio. With the underlying change, basically, it enable us to do those things.
Yeah. I think it's interesting because that is quite a shift, and it's taken time. It's quite a shift, yet the portfolio continues to maintain its DNA as luxurious. But luxurious defined as nice air, nice avenues, nice place to be. That is luxury. You don't need to be watches and jewelry. This is new classic for us. Why do people feel better coming here? Why do you prefer to buy your cosmetics at T Galleria than some other place which is more crowded?
That's luxury. Not to be pushed over. That's luxury. That's new classic. So we curate our affordables, our fun stuff, our children's stuff, our food and beverage without cheapening is bad, is not the correct word. Without actually destroying our DNA, which is still high-end, sophisticated, fun, different offerings, surprise. This is very important.
On the optimal side, it's never going to be optimal because the market changes too much. What is optimal is we constantly look at, do we have too many coffee shops? If we have this Japanese store, will this conflict the, whatever the yakiniku, will that conflict with somebody else also doing yakiniku? So we look at that constantly because we are portfolio wide.
Also when we talk about enhancing our trade mix, it doesn't mean that every single case, this will cause you lower rental.
Okay. I just give you two very interesting example. Haidilao compared with the previous one is double the monthly turnover, but it doesn't have any rental recession compared with the previous one. Esprit changing to Nike, again, is double. The monthly sales is double, but we do have some rental recessions. So I think the case is having good trade mix will sustain and give you maybe next round when you have the same space, the Nike space, it may give you positive rental reversion.
That brings on other people who actually want to be near you. Good people want to sit next to good people. That actually has a very, very big flow on effect, right? Also, we have chopped up big spaces. "Oh, gosh, so and so is going to leave. This was such a big space. Where do I find a tenant?" Actually, the good news is, if you chop it into five, yes, you sacrifice maybe 20% because of passageways. You actually double your rent. It's interesting. We are actually using that to energize our portfolio as well. You do not need to have a If you have a very, very flagship fantastic tenant who wants to take 10,000 sq ft, fantastic too. But there are brand cycles. They may not be able to endure that forever.
It's not the end of the world. We actually seize on that opportunity to churn our client and refresh. That has worked very well.
in many cases.
Irene-
Right
You want to talk about the co-work?
Co-work?
You want to-
Yes. What about the co-work? We talked a little bit about how we have increased our exposure to co-work to nearly 10% of our office portfolio now. The range is from pretty simple, more startup-ish offering, very simple, cheaper, to the more grand. Spaces is very grand. WeWork will be even probably grander in terms of decoration and the type of people they recruit. We have the whole range. Most co-work, actually, although I say we have a more dynamic, more transient traffic, most co-work, their formula is they need to lock in pretty long leases. This churn is very costly for them. It is also a misconception that only startups go to co-work a ctually.
No
it is not. Big institutions actually want to use co-work space because it is part of cost management. It is also part of culture change. We do not talk about particular clients, so we will not talk about the length of our leases. Suffice to say that we have a very, very interesting mix, and we have purposely constructed the portfolio to look like this. We use them to cross over with our retail, so if someone has a new product to launch, they may launch it in Spaces. Or someone which has a more techie type product, they launch it in theDesk, which is more tech startup people. I think that has actually brought in very interesting new traffic and new blood as well.
We strongly believe that co-working space or a flex space is a very important element or offering in a good office portfolio because people do need that kind of space. You see all the market research talking about 30% will be the kind of future portion for co-working space. But right now we are at 10%, maybe. We still feel that is comfortable, and we think our area offering will help to make the co-work become very flourish in this area, because our community concept is a very good match with co-working.
Because they are very big on events. If we say we do 100 events, theDesk probably has two, three, four, five events a week. Part of their revenue base comes from events.
That is very interesting for us as well.
All right. We are running out of time a bit, I am afraid. Let us take one more question.
Thank you very much. David Ng from Macquarie. Two quick questions and then a bigger strategic question. For the latest occupancy costs, can you share with us and how sustainable that is? The expenses ratio, which I guess rose a little bit second half. I think your previous guidance was that it would trend down in 2019. Could you just refresh that guidance? The bigger strategic question is now that Lee Garden Three successfully completed, what is the next big thing for Hysan in the coming years? Thank you.
Okay. First, maybe, Irene, you want? The occupancy cost overall for the group, I think is hovering around mid-teens. It's been there for the last, I would say, 12 months to 18 months already. The expense ratios, we ended up around 19%, which is actually better than we expect. The reason for that is we expect there will be a spike, first of all, in terms of the, in particular, agency fee that we need to record for those new leases commencing in Lee Garden Three, plus the seasonal things about marketing spend towards the second half of the year. But on the denominator side, because you will know that we had better turnover rent. From a ratio perspective, it drives down the ratios. The long-term normalized ratio should be around or below this 19%.
We will continue to work on that, and maybe we will continue to look at the core space to make sure that we are efficient, given sometimes there may be downside pressure on the top line as well. We look at this investment. That's why I think when Irene talks about the return for marketing spend and all that becomes even more important in the next few years. On the strategic-
On strategic side, Lee Gardens here, Causeway Bay will continue to be our core. We talk about that all the time. We are committed. Now we do not have land bank. We have gone outside our core by acquiring Tai Po, which was two years ago now. We will continue to look for outside the core opportunities, but those we will now view them as growth engines rather than non-core.
Because we've been here for nearly 100 years, for the next 100 years, you can see what we have, which is core, which is fantastic. How do we, even for us to continuously do enhancements and improvements, which we always do. We have actually quite a few good. Hopefully we'll share with you in the next half some of our new, very good enhancement works. Not small to be done this year.
There will be some redevelopments in our portfolio. There is the Caroline Hill coming up, so we are interested in that, of course. It's been coming for a long time. I think I dusted off my master plan, which is about 12 years old. But I think it will come. We are always looking at outside opportunities, but outside probably means the Greater Bay Area, maybe Shanghai, because we already have Grand Gateway in Shanghai. Shanghai will always be a very important financial center. Those are going to be our probably next X years, 10, 20, 50 years, growth engine, which we need to build platforms for. But in the meantime, we still have plenty to do in situ.
Great. Thank you everyone, and hope to see you guys in August for the interims. Thank you.
Thank you.
Thank you very much.
Thank you.