Hongkong Land sees challenges in HK office, resilient retail: report

HK office reversion is expected to remain negative into 2024 whilst retail sees ongoing demand. 

Hongkong Land Limited reported an underlying profit of $2.43b (US$312m) for the second half of 2023 (2H23), marking an 11% year-on-year (YoY) decline and a 26% half-on-half (HoH) decrease. 

Whilst the HK office segment faced anticipated challenges, retail demonstrated resilience, driven by positive rental momentum, according to Jefferies Equity Research.

“Uninspiring HK Office was largely expected, but rental came ahead given the momentum in retail. Tenant mix change in landmark could drive luxury consolidation,” the report stated.

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Rental income in H223 was $4.45b (US$570m), surpassing expectations by 6%, driven by positive reversion in malls compensating for soft office rental. 

Amidst delays in project launches, net gearing remained steady at 17% YoY. Signs of peaking net gearing were observed and China's capital expenditure (CAPX) could normalize, with a decrease in unfinished gross floor area (GFA) in FY23. 

On the other hand, the HK office segment continued to face challenges, with a 7.4% vacancy rate and negative reversion trends at -10%. 

Concerns in the China development pipeline were also evident, including a compressed gross profit margin (GPM) and a US$90m impairment on Wuhan projects, partially offset by a $563m (US$72m) acquisition gain. 

The HK office cap rate also expanded by 10 basis points to 3.15%, emphasizing spot rent as a greater risk. 

The outlook suggests continued negative reversion in the HK office into 2024, with ongoing demand from financial institutions and law firms despite weak leasing and high-profile relocations in Central. 

HK retail sees a return to pre-COVID luxury spending, while food and beverage lag slightly. 

Moreover, on capital deployment, management prioritizes new investments and deleveraging over existing assets, and earnings are expected to mildly decline in 2024 due to soft office rental, higher funding costs, and increased property delivery taxes.

“HK Office continues to face headwinds, but HKL's defensiveness may have been understated. HK Retail is an upside surprise,” the report noted.