Good evening, ladies and gentlemen. Welcome to the analyst briefing of Swire Properties Interim Results Announcement. Today's briefing will be hosted by Mr. Guy Bradley, Chief Executive of Swire Properties, and Ms. Fanny Lung, Finance Director of Swire Properties. Guy and Fanny will take us through the interim results, followed by a Q&A session. As usual, before the presentation, we would like to show you a very nice video which highlights the key developments and achievements of the company in the first half of this year. Hope you enjoy.
Good evening, everybody, and thank you for joining us at this slightly later time of the day. As you can see from the video, lots of exciting things happening, I'd like to say as usual, at Swire Properties and pretty much on all fronts. There's a lot to cover. We've had a busy six months. I think the interim results basically portray a set of very strong performance that puts us in a stronger position for the future, and I'll try and run through that in conjunction with Fanny on my right. The 199% increase in underlying profit is the headline result, I think, for the six months. Obviously, it's very much influenced by the divestitures that we'll talk about in a minute.
I think this active capital recycling, which boosts the underlying profit growth, reflects an attempt to make the balance sheet stronger so that we can have lots of firepower ready to invest in the sort of growth pipeline that we're very keen on establishing. The rental income growth was very solid, supporting what you'll see, a very sustainable dividend growth. I think, as I said, it leaves us in a great position to realize some of the opportunities. Historically low gearing since the listing, I think we're running at right now. Some of the key developments, I mentioned disposals. We completed the sale of HKD 15 billion of Cityplaza 3 and 4 in April. In July, the sort of hot-off-the-press news was the sale of our 50% interest in 625 Kings Road, which is an office building we've had for over 20 years, realizing HKD 2.4 billion.
It was very good news. It was very clearly a non-core asset, as was Cityplaza 3 and 4, allowing us to take capital out of essentially old and non-core assets for reinvestment in new assets, and I think that's a very good story. On the new project side, you'll have seen we've had the Singapore project for a couple of years now in the public domain. The new news is it's now called EDEN, and it's due to be finished and completed probably towards the end of the year, I'd say in about November. It's 20 high-end units down in a fantastically high-end location in Singapore, and it'll be our first project down there. The other exciting news in Southeast Asia was the announcement in July of a project on a 50/50 basis with a joint venture partner in Jakarta. That's as yet unnamed.
We'll be unveiling a name for that project in due course, but it's our first project in, again, a very good location in a high-end neighborhood down in South Jakarta there. Quite exciting expansion project for us. Finally, in July, on the finance side, and we'll touch on this a bit later, we announced, in Hong Kong, the first sustainability-linked loan, which I think is a great thing to do. On the pipeline side, I think this is important because a lot's made of the successful divestments, but it's important that we do something with that capital. You can see the published pipeline in front of you on this slide, which shows in 2019, of course, the already well-publicized extension to Citygate Outlets is the big news, and of course, the Singapore project.
Next year in China is the year when we intend to open our sixth investment, Taikoo Li Qiantan, and also to extend and scale up the opportunity that we've already realized in Sanlitun under Taikoo Li, which will be really exciting for Beijing. The other thing to note on here really is just the sort of variety of the mix here and the things that we're doing. Obviously, it's across geographies. You've got Southeast Asia, you've got China, you've got Hong Kong. But we're also investing in trading projects, such as Chai Wan in Hong Kong, such as Jakarta down in Southeast Asia, and we're reinvesting capital into Taikoo Place, as you can see with the Two Taikoo Place launch in 2021.
Beyond 2023, there's a couple of projects in the pipeline there that could actually further augment the exciting story on the office side down in Quarry Bay. Just turning to the investment portfolio for a minute. On the Hong Kong office side, the rental reversions have been extremely strong in the first half. You can see the figures there. Pacific Place, 19%, Taikoo Place office curtain wall buildings at 13%, and One Taikoo Place and One Island East at 11%. I think it's a very robust performance down there. Ditto in Pacific Place for the first half. As you can see, the occupancies in the portfolio are close to full. On the retail side, I think it's now quite well understood that Pacific Place has had, as has most of its shopping mall peers, a fairly sort of soft first six months.
Retail sales down 4.2%, occupancy still full. Cityplaza, relatively better in that sense. It's, as you all know, rather less impacted by visitors from overseas and from the Mainland. Citygate Outlets has also had a lot of closures while we've been getting ready for this extension, and I think has put in a fairly decent performance for the first six months. Not much to say here. It's a familiar slide, which basically continues to show you that we do maintain a strong and diverse tenant base, and the expiry profile of our major leases is extremely well-balanced. I mentioned Citygate Outlets. It's obviously the new exciting news for the summer. We're 98% leased on the new extension, which is fantastic news. Citygate will become an 800,000 sq ft mall. It's almost doubling in size. We hope to have an opening in August on a soft basis going forward.
We've got lots of exciting new outlet brands to stimulate the market, both from overseas and on the F&B side. Just talking about geography here. The pipeline projects that I've mentioned, Citygate, Two Taikoo Place, and the couple more buildings in Quarry Bay, and also the extension that we're going to do to the Pacific Place family in Wan Chai, basically suggest that we are continuing to reinforce the existing clusters of assets that we have in Hong Kong, and that's been a strategy and a focus of ours for a few years now. It underpins the reason why we get rid of non-core assets in places like East Kowloon, because we want to reinvest a lot of that money in basically Admiralty Pacific Place and Quarry Bay Taikoo Place. That's been a focus for a long time. No change in that.
9% growth over the next few years on the completed property portfolio in Hong Kong, I think is a healthy sign that we continue to believe in our home market. But also in Mainland China, you can see on this chart that the figures show we've more than doubled rental income in China since we opened most of our malls in 2013, which I think is an absolutely staggeringly good performance, and it reflects the fact that we've built some world-class shopping malls in some great locations in China, and we continue to have confidence in that market. To reinforce what I just said, here's some detail about the centers that we have. Again, if you look at pretty much all of those, you're in double digit year-on-year sales growth. Sanlitun at 9% maybe being the exception, still a very good performance for our most mature property up there.
Those figures on the chart there really reflect the robustness of the domestic retail spending that we're enjoying at the moment in China for the first half. In terms of the pipeline, I mentioned the addition to Sanlitun coming from another 250,000 sq ft of GFA in Taikoo West. I think the highlight, though, for next year and the big project that we're all excited about in Shanghai is Taikoo Li Qiantan, which we hope to have open very much towards the end of next year. If you haven't already been to see the Qiantan master plan, please go visit. It's a really exciting project within an exciting master plan. Lujiazui, who are our partners on this, have built out a phenomenal project so far in terms of realizing major international partners, including ourselves, and then making it happen.
Just to give you some sort of idea of the scale of Qiantan beyond our mall, their planning and ambitions are for 15 million sq ft of office space, which is sort of one and a half times the size of Taikoo Place by the time it's finished. That will accommodate, hopefully, about 150,000 workers. At the moment, they've got a part of that finished. I think by about 2022, there'll be about 70% of that built. There's about 20,000 office workers currently already in occupation in Qiantan, and we hope that all of that population will nicely feed into the shopping mall experience that we're building here as the first and major retail developer for the master plan itself. So we're very excited about that potential. It's a great location and, as I say, please go check it out.
Just another highlight, I think, with Qiantan is that to show the kind of vision of Lujiazui. About 1/3 of the space of Qiantan is allocated and earmarked for green space. It's actually going to be a really, really attractive place to not just work and shop, but also live. That's quite unusual inside the Middle Ring Road for any development in Shanghai. We're very excited about the choice of location there. Brickell, not much to add, really, versus what we said at the year-end, other than just to say that the mall is nicely positioned and retail sales continue to build. It's still quite early in that process, but we're excited about the tenant quality. The anchors in both the retail and the office are extremely good anchors, great names, and sales are building nicely on the retail side.
It's been a great place to be an office landlord because the market has been very favorable for landlords. We're completely full on the office side, and I kind of wish we'd built more office, really. But there we are. It's not over in Brickell. We've got phase II to come, and there's an office component in phase II. On the trading side of the house, you know Reach and Rise over in Miami. We continue to sell at a reasonably slow pace versus 2014, 2015 when the market was very hot, selling three to five units a month at this stage. We've currently nearly finished the sales of Reach, and we're about three-quarters of the way through the sales of Rise.
It's a slower story, as we've been saying for the last sort of 18 months, based on the fact that Latin America, from an economic point of view, is still somewhat slow and a major source of our buyers comes from Latin America, and I think you all understand that. Also, Southeast Asia we've covered, but they are trading projects, and I think they represent our ambition to do more residential trading. Again, not to mention our home market, which we know and love and understand so well. We've got the 21- 31 Wing Fung Street project, which is small but high quality and just off Star Street there next to Three Pacific Place. Then there's a potential for building out Chai Wan into a 700,000 sq ft residential project with a tiny bit of retail in the podium.
That will be on Hong Kong Island, of course, and we're quite excited about moving forward with that project. On the hotel side, very pleased to report that the hotels that we manage, we've got seven hotels that are currently open now. None of them are being built, they're all now operating. I'm delighted to say that the operating profit before depreciation increased to HKD 122 million for the first half, which is an 18% increase on last year. What you're basically seeing in trend terms is the ramping up of all our new hotels to a maturity stage, which we're going to be pretty comfortable with right now. On the non-managed side, we obviously have stakes in some of the Pacific Place hotels and other hotels around the world, including Miami and Guangzhou.
But the exciting news here is that as well as the Citygate retail extension, we get a new hotel out in Tung Chung called The Silveri Hong Kong, which is part of the MGallery brand, and that will be opening later in the year. At this point, I am going to ask Fanny to take you through some of the numbers, and then I will come back at the end.
Thank you, Guy. First half result is a very good set of number, I would say. The total underlying profit is up to HKD 18.6 billion, a record high for Swire Properties. Two main reasons. One is the very strong divestment profit generating HKD 14.6 billion, and also very solid performance from our recurring activities. If you look at the table, roughly from the recurring activities, most of the profit was generated from the investment property portfolio, which generated a very solid growth of 7% on a year-on-year basis. Trading property was a little bit thin because last year we did have the contribution from the sale of [Arezzo] in Hong Kong, which we did not have this year as it was finished last year. Hotel did a very good job making a turnaround, producing underlying profit of a positive number of HKD 52 million.
That was mainly driven by the fact that U.S. did very well with a higher occupancy and RevPAR, together with the two new hotels in Shanghai ramping up very nicely over the period, which offset the slightly struggle performance that we encountered in Hong Kong. On the divestment profit, largely it was driven by the divestment of the Cityplaza 3 and 4. I think we have not finished all the booking of the divestment profit. You will be able to see in the second half that because of the completion of the 625 Kings Road, the related profit will be reflected also in the second half as well then. So on the investment property portfolio, the gross rental income. This is an analysis of the portfolio across the board.
I am very pleased to say that basically all across the board, we recorded a very good growth in Hong Kong, China, and also in U.S. as well. In Hong Kong, the office portfolio was up by 5%. As Guy mentioned, we have very good positive rental reversions recorded in our office portfolio, ranging from quite a lot of double-digit positive rental reversions. On the Hong Kong retail portfolio, despite the very challenging condition, we did have a 3% up from that of last year. Basically, it was generated from the higher base rent. For our PRC portfolio, it was a fantastic performance for the whole portfolio with the five existing projects, each of them generating ranging from a high single digit to a double digit sales growth. Not only that, the rental reversion was quite positive for the whole portfolio as well.
Across the board, on an overall basis, we achieved a 14% increase in the Renminbi terms. Of course, we all know that the Renminbi depreciated, which resulted in an 8% growth in the PRC total rental growth. U.S. also did very well. As Guy also mentioned, the sales growth for U.S., which drove the rental income upward. This slide shows the historical dividend per share growth over the past five years. We did have a cumulative annual growth rate of 6% over the past five years. For the first interim dividend, it was a 7% growth on a year-on-year basis. Our aim is to deliver a sustainable growth in the dividend per share. How are we going to do that? As Guy in the first part mentioned, we did have quite a lot of exciting programs, including for the investment property portfolio.
We are adding almost 20% of our GFA capacity in the future, including the project like developing Wellpool, Zung Fu, Wa Ha, et cetera. On the PRC side, we are also growing our retail portfolio by adding Qiantan and also the expansion of the Taikoo Li Sanlitun, which adds another 10% of our GFA portfolio for our PRC portfolio. I think with that growth in our GFA, we are comfortable that we will be able to deliver a growth in the future for the dividend per shares. A very important value of our asset is in the investment property portfolio. On an overall basis, the total portfolio grew by 1%, up to HKD 276 billion. The major increase was represented by the fact that we did record a net fair value gain in our investment property portfolio of about HKD 3.8 billion. There was no change in our cap rate.
The upward change in the fair value was driven by the open market rent increase in our office portfolio in Hong Kong and also in our PRC portfolio. Also with the increase, it included the capital expenditure that we spent in our investment property portfolio, mainly reflecting the Taikoo Place redevelopment as well as the capital expenditure on our Pacific Place. We did have a little bit of translation differences reflecting the Renminbi devaluation. On the financial capacity of the company, as Guy also mentioned, the divestment program added quite a lot of strength to our balance sheet. Looking at the net debt position, you may notice a very substantial reduction in our net debt position, dropping from HKD 29.9 billion by the end of last year to HKD 15.67 billion at the end of June this year.
The major change was due to the divestment proceeds, HKD 14 billion generated for the first half of this year. Mainly reflected that the proceed, the remaining balance of Cityplaza 3 and 4 divestment and some other investment property that we dispose of as well. Apart from that, you can also see that we have very strong cash flow from our rental mainstream, which generated HKD 5.4 billion. Which also, because of all these, if you look at the top right-hand corner of the table, which summarize the key financial parameter of the company. The company's financial position has been going from strength to strength, and now we have reached the strongest position with our gearing ratio at 5.5%, and all the interest rate parameter is having the best position ever. This is the maturity profile and the liquidity, very healthy outlook.
Not much that I can add. You may notice that we have quite a lot of cash at the end of June 2019. That is for some reason, which I am going to touch on that later on. The other point that I would like to highlight is the sustainability-linked loan that we signed in July this year. This is a new initiative in order to support our SD 2030. The company do have more appetite to do the green financing in order to support the development of the green financing in Hong Kong. Even though we have quite a lot of cash for the time being, I think we do have appetite to convert some of our existing non-green portfolio into green. Please get your proposal ready if you have interest on that. The capital commitments, this is to summarize the capital commitment of the company.
Altogether, we still have HKD 16.8 billion capital commitment, with quite a lot of that in Hong Kong. The Hong Kong numbers includes the Wa Ha and Zung Fu future capital commitment, as well as the Po Wah Building redevelopment, and which is also on top of the Taikoo Place development, mainly for the phase II, which is Two Taikoo Place. The Mainland China number include mainly the Qiantan development and also the Taikoo Li Sanlitun West development. But I have to say that beyond this number, we have been working on quite a number of projects in Hong Kong and also in PRC. These are projects that we have not signed the agreement, so they are not included in this particular sheet. As soon as we have the commitment or agreement to sign that particular agreement, this particular number, I am sure that will go up.
This is a summary of all our divestment program proceeds. So far, we have done altogether realized HKD 27.9 billion through this divestment program. I think we have largely received that all of them except around HKD 0.2 billion, which we will still be receiving in the second half of this year. So it is pretty successful divestment program that we have done so far. But I think we have done most of the non-core asset in our portfolio. In summary, what I would like to remind everyone is we do have quite a strong financial position due to the divestment program, which improve our profitability for this year. But the money that we have for the time being, is to provide the growing power in the future by investing into the project that we are working very hard on.
That will drive the future recurring profit for the company.
Thank you, Fanny. I will just cover a brief few comments on prospects and finish with some news on sustainability. Prospects wise, I think we can expect downward pressure on rents in the Central market for the fact that there are two reasons. One, that there is vacancy caused by a movement to decentralize offices down in Taikoo Place, which we are probably responsible for largely. But also, there is clearly a softening of demand in Central from Mainland China at the moment. We have said this before, I think it is well understood. The effect of all of that on Pacific Place is minimal, I would say. We are still enjoying good reversions in Pacific Place office, and we are full at the moment. So although there is that softness emerging at the moment, we are not feeling it too strongly in Pacific Place.
On the Taikoo Place side of office, you are still seeing robust demand as the flip side of what I just said for Central. So that is great news for the great story that is going on down there, and rents are very resilient because of that. So we are kind of optimistic about trying to pre-lease Two Taikoo Place, which is the next exciting building in our repertoire, and it is another 1 million sq ft on top of One Taikoo Place, which is now 80% occupied, I think. Hong Kong retail is soft for the first six months. It was softening last year. It has continued to be soft this year. I think for the balance of this year, there is no reason to expect any change in that for obvious reasons that we are going through at the moment, coupled with this drop in visitors.
I think Hong Kong retail, the outlook will continue to be on the soft side. Conversely, in China, with the Renminbi being slightly weaker, that will impact Hong Kong, but it will have probably a positive effect on domestic spending, and the fact that the visitors that do not come here will choose probably to stay in China and spend there, and we have seen that effect before. We are confident that for the rest of the year, the China centers on the retail side will continue to perform well. That is pretty much what I want to say on the prospects. We can do some questions later. But the final slide, which I always like to finish on, is what we are doing on the sustainability front.
And the news since we last spoke on this, in no particular order, are that we have extended our alliance and our funding of the research department in Tsinghua University up in Beijing, who are doing some great pioneering work in terms of building energy efficiency. We have been working with them since 2008. We have a great partnership there, and we are getting some fantastic learning out of some of the work that they are doing, and we have extended that arrangement. We have also become the first and only real estate company in Hong Kong and China to commit to Science Based Targets, which are a very stretching set of targets under the Paris Agreement. But we are confident that we need to be that ambitious.
Not in the slides, but you may, if you have been very observant, have caught it in the video, but the hot news in INDIGO in Beijing is it has become the first mixed-use project in the world to be awarded the LEED v4.1 Platinum award for existing buildings. So we are quite excited about that. As Fanny just mentioned, we just launched the first sustainability-linked loan. So we are not sitting still on this important area. In fact, we are trying to realize our vision of being the leader in the industry globally by 2030, and that is some great progress towards that goal. With that, we will stop and take questions. Thank you.
Thank you, Guy and Fanny. We now open the floor for questions. Some house rule, as today's Q&A is being webcast, so please wait for the mic, state your name and organization, and please ask no more than two questions at a time. We now take the first question. The gentleman at the front row.
Hi, it is Ken from Citi. I have two questions, one on office. The first is on office. I keep reading your quarterly operating data, which is very informative. I think this is the first time for many years that we see the latest rental for One Pacific Place, Two Pacific Place to drop HKD 5. So my question is, are you seeing this? How significant, or basically, how long do you expect that this kind of downtrend should we see? That is, how do we expect in terms of the rental reversion in Central for your portfolio in, let us say, in second half or 2020? On another side is on your Quarry Bay portfolio.
Shall I just answer that before you go on and I'll forget the first question?
Please.
I would say I wouldn't read too much into that figure. We did lower the range to HKD 160 per sq ft at the top end. But typically at that end, those are very small deals, small space deals and on a one-off or two-off basis. I wouldn't take too much attention to that being a major significant event. But I did say that inquiries and demand in Central, including for Pacific Place, has dropped off significantly. And so there is a lack of demand. But that was very much at that end of the market. We're looking at small space spot deals and we just didn't have one at the high levels that we had in the previous six months.
We're part of Central, but we're full at the moment, and reversions, as I said earlier in the commentary, are still positive for the rest of the year. Question two.
How about the outlook or forecast on reversion rate? I mean, for office.
Well, that's for us.
That is for Central.
Well, that was for us.
Yeah.
Yeah.
Is it going back to a single digit or
I think we said it's sort of high single digits. We've been in double digit territory for quite a while, and I think we're probably looking at high single digits for the balance of the year. Which is what we actually said at the year end too. There's not been a lot of change on that.
I think second question is on dividends. Basically, last time when you pay out that kind of second interim dividend that Fanny mentioned that it has partly considered the disposal gain on that. But of course, this time, the first interim, we didn't see that it's linked to that kind of disposal gain of Cityplaza 3 and Cityplaza 4. Should we expect that will be somewhat to be paid out in the second interim dividend?
I think we mentioned previously that we will not distribute any special dividend arising from the disposal of Cityplaza 3 and Cityplaza 4, and the proceeds will be used to drive future dividend growth. I think we are in line with this particular statement. For how much that we are going to drive on the second interim dividend, that will be the key thing. I think this will depending on the second half result as well as the new projects that we are putting in the future then.
Thank you. We will take another question. Any question?
Thanks. Justin Kwok with Goldman Sachs. Perhaps two questions again. One on the trading property side. Now you have started the operations for both Singapore and Jakarta. From the opportunity standpoint or from your allocation standpoint, do you think these cities will become more meaningful to you, or it is more like still in the very early stage of investment where we are just keeping this level of exposure for the time being? Perhaps as a first question.
Well, I think the answer is over the longer term, it will become more meaningful. But we are learning. We are learning through these first projects, and it is probably the case that until we get the experience from these projects, we will not be scaling up at a rapid rate. But we will see. I mean, there is an appetite to do more in both markets and perhaps more in other Southeast Asian countries as well as we go forward. I mean, we are exploring Vietnam a little bit as well at the moment, and maybe more to come on that. But yeah, look, I think we are very happy with the small position that we have got. We have been there in both those cities, Singapore and Jakarta, for over three years now, and this is what we have got to show for it.
I mean, they are great locations and we are quite excited about doing these residential projects and learning how it works in different places. I would say, though, that our appetite for doing more residential trading in Hong Kong continues to be strong. It does not look like that at the moment because we ran out of land bank when we finished selling the last projects in the mid-levels. We are looking pretty hard and quite keen to find something. We are not going to overpay for that. When we see something that we like, we will move quite aggressively to do that in Hong Kong.
Okay. Thanks. The second question is, would you be able to give more color on your tenant sales in both Pacific Place Mall and Cityplaza in June and July to get a sense of where the performance are in a way? Thank you.
Well, Pacific Place and slightly different. We had a fairly soft July in terms of tenant sales. We do not publish monthly data, as you know. We publish quarterly data, but I can tell you that July was softer than the first half figures that you do see. There were two reasons for that. One was obviously the disturbance that we encountered in Pacific Place, and the second reason was the closure of Harvey Nichols. So there were no sales coming out of Harvey Nichols in July. It was not a very good month from that point of view. Generally speaking, the F&B sales growth is reasonably good and most of the other sort of new brands that we are bringing in are performing quite well.
What we are doing with the Harvey Nichols space on level 1 is actually cutting it up and replacing it with some exciting brands like I.T., Glasstique, Adidas. So we are starting to add more variety into the Pacific Place mix, which I think will be an enhancement long term. Over in Cityplaza, I think there has been a general sort of solid sales performance, really, versus where Hong Kong market was. I mean, to even achieve positive territory, I think, is not bad, actually. For example, the Eslite bookstore that we have invested a lot in is growing quite nicely. It is not where we want it to end up, but it is improving year-on-year and we are very happy with it. Some of the other anchors are good. So overall, the picture is reasonably positive, I think, for Cityplaza.
We're looking forward in 2020 to a new ice rink as well, for those of you that like to skate. It's certainly something that everyone who's grown up in Hong Kong remembers about Taikoo Shing and Cityplaza. We felt it was time for a new one. We're going to kind of reinvest in doing that for next year. That'll be quite exciting.
Perhaps I can also add that even though you haven't asked the PRC portfolio, the PRC portfolio, the sales number in July is also trending very well. It's also a very encouraging information for you then.
Thank you. Any more questions? I guess it's quite late now. We'll take the last question from that gentleman.
Hi. Thank you. This is Simon from HSBC. Can I ask two questions? The first one is, can you give us a bit of color on the rental income in the Hong Kong portfolio if we exclude sales in Cityplaza on a like-for-like basis? Thank you.
If I may turn to you.
I think for our office portfolio, you know that we have indicated a 5% up from that of last year for the office portfolio. If we were to take out 625 and also if we were to take out the One Taikoo Place, which is the full-year addition, and also the loss of Cityplaza 3 and 4, basically the upward increase was 3%.
Thank you. The second question is also a follow-up on the dividend payout policy. Because I think we mentioned before during the full-year result that we want to give out around half of our underlying recurring profit. Can I ask, can we expect an uplift in the second half on the payout ratio, given that in the first half is around slightly lower than that ratio? Thank you.
I think this is quite reasonable to expect that because this is really our policy to distribute 50% of our underlying profit over the cycle. We would, in due time, catch up with that, in due time.
Thank you very much. We apologize for the delay in hosting the briefing, and thank you for joining us today.
Thank you very much.