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3 Key Thoughts Hongkong Land Holdings Limited’s Management Has On Its Biggest Profit Contributor

Hongkong Land Holdings Limited (SGX: H78) completed a decent year in 2015.

As a brief background for context, Hongkong Land is a leading property investment, management, and development group with operations primarily in Hong Kong, Singapore, and mainland China. Its business can be segmented into the commercial office rental market and residential real estate development.

For 2015, the property owner-developer recorded US$905 million in underlying profit, a slight decline from the US$930 million recorded a year ago. The components of the underlying profit are displayed in the presentation slide below:

2016-03-09 Hongkong Land
Source: Hongkong Land’s Earnings Presentation

As you may gather, the Commercial property segment has a significant influence on Hongkong Land’s underlying profit. For further context, Hong Kong was the most important geography for the Commercial property segment; the region contributed US$778 million of the segment’s US$942 million in underlying profit.

There were three key questions analysts had asked about the Commercial property segment in Hongkong Land’s recent briefing for its 2015 earnings. And with the questions, the company’s management team had shared three key thoughts about the segment that may be worth noting for investors.

On the weighted average lease expiry (WALE)

A question was asked about the reason behind the longer WALE recorded in 2015. For reference, Hongkong Land’s office Central portfolio increased its WALE from 3.4 years in 2014 to 4.1 years in 2015. YK Pang, Hongkong Land’s chief executive, gave his take:

“Basically, as anyone in the property industry, it will be depending on times of the supply and demand. And on the tenant’s position, we would always seek to ensure that we have stable income going forward. When opportunity presents itself, we will obviously extend the lease expiry and renew leases. It also reflects the desire on the part of the tenant to lock in to their positions in Central, in fear of not having the space that they would need going forward.

So, it’s a two way street. So far, we have seen a lot of positive reception on extending leases in Hong Kong and Singapore.”

On retail sales and rental affordability

Retail sales in Hong Kong have softened. Pang gave his take on the situation and how it relates to Hongkong Land:

“I think if you look at what is being reported in the press – overall in Hong Kong, retail sales has not been as strong as it has traditionally for a number of years. I think there are a number of factors that has affected the retail sales in Hong Kong overall.

And, I think in our own portfolio in Central, we have also seen a fall – in particular, especially in the most high end has seen a decline over previous years. I think from our point of view, because the majority of our rental income comes the fixed rent component and only a small portion comes from the turnover rent, the impact on Hongkong Land is actually quite limited.

We have seen a reduction in retail sales, but this is after a number of years of continued climb, you see a dip, but this is still higher that what you see two or three or four years ago.”

Related to the above, there was also a question posed on the affordability of retail rents in Hong Kong. In particular, luxury retailers have been raising concerns aout high rents in Hong Kong. To this, Pang gave a candid reply:

“I think that is a common battle cry that you hear in the market. I think, as I mentioned a moment ago, retail sales has come down, so I think it is quite natural for players in the luxury retail area to ask – perhaps, rental is too expensive?

I think the truth in the pudding is in the eating. And whether they renew their leases, or whether they are continuing to rent some space in particular portfolios of property. I think our 100% occupancy and the numbers in our rent, that we disclose in our presentation, I think says it all.

I think we have here, the retail portfolio in Hongkong Land in Central – a very iconic and very prime portfolio which is not only targeting mainland visitors, whom of course, as you know has [seen] reduced numbers, but we have also addressed the shopping habits and needs of the Hong Kong population. Of course, we have a native group of office workers sitting on top of our retail portfolio who are there everyday coming for work and they have visitors too.

So, I think our portfolio is more resilient, we are 100% full, and we have experienced positive rental reversions in the past year, despite the problematic environment.”

In short, Hongkong Land remains resolute about the value proposition of its properties and their iconic status. Later on in the briefing, Pang also mused on the popularity of Hongkong Land’s Christmas decorations last year for its properties and how they seemed to be extremely popular within the social media space.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Hongkong Land Holdings