Hongkong Land Holdings Limited (H78) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us in person to review Hongkong Land's results for 2023. We're also pleased to welcome those of you participating online. I'm Robert Wong, the Chief Executive of Hongkong Land. And with me is Craig Beattie, our Chief Financial Officer. Following our conversation, or presentation, there will be an opportunity for questions. For those of you watching via the webcast, please send us your questions through the website, and we will include them in the Q&A sessions. As you are aware, this is my last presentation as the CEO of Hongkong Land. I would like to thank all of you over the years in the interest of Hongkong Land and many wonderful questions that you have asked us from time to time over the last almost 8 years. And over the years, I'm very pleased that you have not been posting very difficult questions to me. And so please, today, continue the very good culture in the past. Today, I will take you through some key updates and results highlights for investment properties and development properties before turning over to Craig to cover financial highlights. I will then conclude with an update of the group's sustainability and other corporate initiatives as well as our outlook followed by Q&A. Before I move into the full year results in detail, let me first provide a brief update on our key business segments, along with observations in each of our key markets. In Hong Kong, geopolitical, economic economies, uncertainties has negatively impacted office leasing momentum, slower pre-leasing activity in new office supply, predominantly in decentralized areas has resulted in an increase in vacancies across the city. In Central, subdued capital market activity has also dampened office demand from the financial services and asset management sectors. The group's central portfolio vacancy continued to outperform the office market, both across Hong Kong and within the Central District. This is driven by flight to quality demand from new tenants attracted to the portfolio central locations, premium offerings and strong sustainability credentials as well as the retention of existing tenants. On luxury retail, trading conditions at the landmark have improved significantly compared to 2022. Flagship tenant sales have largely returned to pre-pandemic levels. Moving on to Chinese Mainland. Due to uncertainties across the broader Chinese economy, sentiment for the residential market remained weak during the year. Presales at the group's residential development slowed given struggles in the broader market. Although performance was more resilient relative to the general market due to the group's focus on the premium segment in top tier cities. Turning to retail. There was a good recovery in tenant sales in 2023 at both WF CENTRAL in Beijing and One Central Macau. In Singapore, office leasing momentum in the CBD has moderated as a result of uncertain macroeconomic conditions. The group's portfolio continued to perform well due to flight to quality demand as well and a tight office supply in the CBD area. On the residential side, the market sentiment also moderated in the second half of 2023, after a strong start to the year as a result of higher interest rates and the cumulative impact of cooling measures. Presales as the group's newly launched Tembusu Grand project in April this year were satisfactory. Turning to the overview of 2023 results. The group's underlying profit in 2023 was USD 734 million, down 5% compared to the same period last year. Profits from the group's investment properties business increased mainly due to improved performance from our luxury retail portfolio and Singapore office. This was partially offset by reduced contributions from the Hong Kong office. Total contributions from development properties declined, largely due to challenging market conditions on the Chinese Mainland. Loss attributable to shareholders was USD 582 million, which included a net loss of USD 1.3 billion, arising mainly from revaluations of the group's investment properties portfolio, due to negative rental growth and a slight increase in capitalization rates for Hong Kong office. In terms of underlying earnings per share. The group generated USD 0.3315 while the overall loss per share was USD 0.2629 after the impact of nontrading items. The net asset value per share as of 31st December 2023 was USD 14.49. The group's financial position remains strong with net debt declining to USD 5.4 billion at the end of 2023. The Board has declared a final dividend of USD 0.16 per share, which bring the total dividend for the full year to $0.22 per share, unchanged from the prior year. I shall now turn to investment properties. Turning first to our Hong Kong office portfolio. Performance from the office portfolio remains resilient and continue to outperform the overall market. Rental reversions were negative in 2023 with average office rent decreasing to HKD 106 per square foot per month from HKD 111 in 2022. Physical vacancies at the end of 2023 increased to 7.4% from 4.9% at the end of 2022. On a committed basis, vacancy was 6.8% at the end of 2023 compared with 4.7% at the end of 2022. By comparison, vacancy based on existing lease commitments across the Hong Kong Central Grade A office market was 9.9%, an increase from 8.8% at the end of 2022. The weighted average lease expiry at the end of 2023 was 3.8 years compared with 4 years at the end of 2022. The portfolio's top 30 tenants who occupy close to half of our total office net leasable area in Hong Kong had a weighted average lease expiry of 5.4 years. At the end of 2023, 31% of our Hong Kong office portfolio is subject to expiration or rent revisions in 2024, of which only 13% were subject to expirations, including concluded renewals and rent reviews up to the end of February 2024. This has actually increased to 19% of our portfolio with approximately 7% relating to expirations and the remainder to rent revisions. To put some context into our numbers, I would like to dive further into the overall central vacancy and supply dynamics. Since 2017, the group's central portfolio vacancy has outperformed the broader central market as well as Hong Kong overall. This is in part due to the unique ecosystems, including top-notch ancillary facilities and strong tenants community the group has cultivated over the years. In addition, the group's active lease management in recent years, its ability to respond to tenants changing preferences and expectations, flight to quality from new tenants and modest expansion demand from existing tenants have all contributed to this outperformance of the broader market. The group continued to innovate by introducing new concepts and improving its service. This includes a significant efforts made on delivering sustainability initiatives to meet the rising tenants' expectations. Based on data from JLL from now until 2028, an estimated 9.3 million square feet of new office space is expected in Hong Kong, of which 1.3 million will be in Central. To put this into context, the existing space in Central at the end of 2023 was 24 million square feet. And this new stock represent only around 5% of the total stock in Central in 2028. Turning to the LANDMARK, which continues to deploy eminent luxury shopping and fine dining destination in Hong Kong. In 2023, trading conditions improved significantly at the LANDMARK. Average rent increased to HKD 203 per square foot per month due to a combination of higher tenant sales, positive base rent reversions and the phasing out of temporary rent relief. In terms of occupancy, the LANDMARK remains effectively fully occupied tenant sales has increased by an estimated 40% year-on-year, largely on par with historical high achieved in 2018. In April 2023, the group successfully debuted Forty-Five, a multi-concept social destinations occupying the 44 floor and the rooftop of Gloucester Tower, spanning 20,000 square feet houses, 5 premium F&B concepts. Forty-Five demonstrates the group's commitment to deliver exceptional experiences to customers and to cement central status as an attractive destination for affluent visitors. Turning now to our Singapore office portfolio. The group's office portfolio continued to perform well, driven by flight to quality demand and limited new supply, despite moderating sentiments due to global economic uncertainties. Average rents continue to show growth, while occupancy remains resilient. Average gross rent across our Singapore portfolio in 2023 was SGD 10.9 per square foot per month, a 3% increase from the SGD 10.6 in 2022. Positive rental reversions were achieved during the year. Physical vacancies across the portfolio was 1.9% compared with 7.5% at the end of 2022. On a committed basis, vacancy was 0.9% with the portfolio effectively fully let-out. As at the end of 2023, 17% of our portfolio was subject to expiration or rental reversions in 2024, including concluded renewals and rent reviews at the end of February 2024, this has increased to 14% of our portfolio with all relating to expirations. Turning to our key investment properties. At our 2 luxury malls in Beijing, WF Central and Macau -- One Central Macau i.e., there was a good recovery in tenant sales and footfall in 2023. Performance was markedly improved compared to 2022, although the second half of 2023 saw slower growth compared to the first half. In Beijing, tenant sales at WF Central were up 44% against 2022. This was partly a result of our tenants' repositioning efforts. At the end of 2023, the property was 89% [ let ] compared to 82% at the end of 2022. In Macau, footfall and tenant sales in 2023 benefited from the return of visitors from Hong Kong and the Chinese Mainland with tenant sales increasing 42% comparing to 2022. Moving on to development properties. On the Chinese mainland, the group's development properties pipeline includes 37 projects spread across 7 cities with total attributable developable area amounting to 8.4 million square meters. Of these, construction of approximately 74% has been completed at the end of 2023. Chongqing remains our largest market and accounts for 60% of our Chinese Mainland business by attributable developable area. We currently have 15 projects in Chongqing, with an attributable developable area of 5 million square meters. By exposure in U.S. dollars, which comprises committed development costs, less presale proceeds contractually secured, the group's total exposure on the Chinese Mainland accounted to USD 8 billion as at 31st of December 2023. The Chongqing is our largest market on the Chinese Mainland and account for 32% followed by Shanghai, Nanjing and Wuhan, which account for 20%, 18% and 14%, respectively. During the year, the group's share of development properties revenue recognized on the Chinese Mainland including its subsidiary and share of joint venture was USD 1.6 billion. This represented a 13% decrease from the prior year, mainly due to lower sales completions. The group's share of contracted sales was USD 1.5 billion, an 18% increase compared with 2022, mainly due to more sales launches during the year as well as the group's focus on the more resilient premium residential segment in top tier cities. At the end of 2023, the group share of sold but unrecognized contract sales in its developments on the Chinese Mainland was around USD 2 billion with 77% expected to be recognized in 2024. The group recorded a gross margin of 19% in 2023, down from the 22% recorded in 2022, primarily due to lower margins on certain slower moving projects. Turning now to Singapore, where the groups have 6 development projects with a total attributable developer area amounting to approximately 164,000 square meters. Of these constructions of approximately 16% has been completed at the end of 2023. Residential market sentiment moderated due to high interest rates and the cumulative impact of cooling measures. But sales performance at the group's existing projects remains very satisfactory. By exposure in U.S. dollars, the group's total exposure in Singapore amounted to just under USD 1 billion as at the 31st of December 2023. Revenue recognized in Singapore was USD 443 million compared with USD 379 million in 2022 with contributions from leading green Piccadilly Grand and Galleria as well as Tembusu Grand. In terms of sales performance. Contracted sales in 2023 was USD 587 million compared to USD 615 million in 2022. The year-on-year decrease was mainly driven by reduced sales contributions from leading green, Piccadilly Grand and [indiscernible] during the year as the majority of those units have already been sold, partly offset by sales contribution from Tembusu Grand, which launched in April 2023. As at the end of 2023, sold but unrecognized contracted sales in Singapore was USD 736 million, with 28% scheduled to be recognized in 2024 under the percentage of completion method. In 2023, the group continues to be disciplined and opportunistic in the evaluation of development properties opportunities. During the year, the group secured 2 new projects on the Chinese Mainland, 1 in Chongqing and 1 in Beijing. The Chongqing site is adjacent to existing residential and luxury retail projects that the group has under development in the [ Guan Yin Xiao ] area. The residential-led mixed-use site has a total developable area of approximately 301,000 square meters and is expected to be completed in 2026. In September, the group secured a 20% interest in the development of a residential-led mixed-use site in the western side of Beijing. The total developable area of the site is approximately 199,000 square meter. In Singapore, the group's acquired 2 residential sites both in the outside Central region of Singapore. Both sites will be developed in joint venture with other developers. The sites located in Clementi area and is close to Tembusu Grand, another residential project of the group that is currently in presale phase. The residential site has a total developable area of approximately 547,000 square meters and is expected to be developed into 501 residential units, expected completion is in 2027. The other site is located in Pine Grove with a total developable area of approximately 609,000 square feet and is expected to develop into 552 units. Expected completion is also in 2027. Next, I would like to provide some highlights on the progress of our existing pipelines. Turning to an update on our Chinese Mainland retail pipeline. Inoperated by the launch of WF CENTRAL Beijing in 2019, the central brand is Hongkong Land's leading premium luxury retail series on the Chinese Mainland. The group expects to launch 4 additional central branded luxury retail properties from 2024 to 2028 in Nanjing, Chongqing, Suzhou and Shanghai with an estimated attributable net lettable area of approximately 162,000 square meters. In 2021, the group opened a 7-level shopping mall under the lifestyle retail brands, The Ring in Chongqing. This property is the first in the series of malls under development under The Ring brand. The group expects to launch 6 additional malls under this brand from 2024 to 2028 with an estimated attributable net lettable floor area of approximately 196,000 square meters. In terms of pre-leasing progress, the group has received very positive feedback from major brands on our Central Series projects in Chongqing, Suzhou and Shanghai, while Nanjing has been more challenging due to intense local competition. On the lifestyle retail pipeline, the next Ring series mall to open will be in Chengdu. Pre-leasing for the property is on track as it is just under 60% committed today. Upon completion in 2028, the group's total attributable retail net lettable area under these 2 brands will be 3x greater than the current levels. These assets will provide the group with a strong source of growth in recurring income stream. Turning now to an update on the West Bund. Good progress has been made on the development of the West Bund Financial Hub, the group's 1.1 million square meters prime mixed-use developments in Shanghai. Phase 1 includes primarily the residential component, both for lease and for sale as well as parts of the premium lifestyle retail for lease components. [ Momento ], the residential for sale towers on Prop G has completed construction at the end of last year, with sales launch expected in 2024. Given the luxury positioning, we expect the project to be well received by the market. In the first phase of the group proprietary branded rental apartments, West Bund Central Residences, and the ancillary retail for these components is on progress to be launched in the second half of 2024. Phase 2, which is expected to be completed in stages between 2025 and 2026 will consist of low- and mid-rise offices, hotels and other cultural facilities. The groups have received positive feedback from the market on its office products and has made very good progress with a number of interested parties. Phase 3 will consist on the office and luxury retail for lease as well as the premium hotel and service apartments, which is expected to be operated by a global high-end hotel brand. The positioning of Phase 3 is expected to rival our Central portfolio in Hong Kong. Completion is expected in stages from 2026 to 2027. I will now turn the presentations to Craig to cover the financial highlights.

Thanks, Robert, and good morning, everyone. Nice to see you all here today. I'll now take you through the financial performance of the group in 2023. Everything I refer to here is in U.S. dollars, unless otherwise indicated. The group delivered a respectable performance in 2023 with underlying profits at $734 million, down 5% compared to the prior year. Contributions from investment properties increased while development properties declined due to less favorable market conditions on the Chinese mainland. Investment properties operating profits increased by $33 million year-on-year, and this increase was mainly due mainly from our luxury retail portfolio in Hong Kong, Beijing and Macau, which saw improved tenant sales and footfall since anti-pandemic restrictions were lifted. Performance for the Singapore office portfolio also improved on the back of positive rental reversions. This was partly offset by lower operating profits in Hong Kong office, primarily from negative rental reversions. Operating profits from development properties decreased by $131 million year-on-year, primarily due to a combination of lower profit margins, less planned sales completions on the Chinese mainland and the impairment of 2 residential projects in Wuhan. Total contributions from projects in South Asia were on par with the prior year. There was a net decrease in tax charges in the period due to a smaller share of profits coming from the Chinese mainland where tax rates are higher than in Hong Kong. This more than offset higher financing costs resulting from rising interest rates. Overall, the operating profit split between investment properties and development properties was roughly 78% to 22% in 2023 compared with 70% and 30% in 2022. Turning to rental income, which increased by 4% compared with 2022, mainly driven by improved performances from across all segments, except the Hong Kong Central portfolio. The combined rental income from our office and retail portfolio in Hong Kong decreased by a net 1% when compared with the prior year. Rental income in Singapore increased by 8%, benefiting from healthy demand and supply dynamics with positive rental reversions across the portfolio. On the Chinese mainland, rental income increased 19%, benefiting from significant improvements in tenant sales since pandemic restrictions were lifted. In particular, contributions from our WF CENTRAL Mall in Beijing have increased as we begin to see the benefit from our tenant repositioning efforts. And contributions from our hotel operations in Beijing and Macau improved significantly as visitors returned in 2023, leading to higher occupancy levels. Turning to the operating profit of the group's development properties by region. Please note this slide includes the group's share of joint ventures and associates. Profits on the Chinese Mainland, just to remind you, are recognized when projects complete construction and are handed over to buyers. This means that construction progress and the number of projects in the pipeline will cause fluctuations in profitability across reporting periods. Profits in the period reduced by 43% year-over-year, reflecting a combination of fewer number of project completions, slightly lower profit margins and an impairment of $90 million recognized on some residential assets. Profits in Singapore are recognized on a percentage of construction completion basis was slightly different from what we do in China. Profits in 2023 were largely in line with the prior year. Contributions in Indonesia increased slightly due to more planned sales completions. And in other South Asian countries, operating profits decreased with 2022 profits benefiting from the completion of a large residential project in Vietnam. I will now provide you with an update on our balance sheet. The net asset value at 31st December 2023 was $32 billion, down 4% compared to the end of the prior year. This decrease was primarily from lower valuations for our Hong Kong office assets due to a 4% decline in open market rents and a small expansion in cap rates, partly offset by higher capital value for Hong Kong retail assets, due to higher open market rents. Share repurchases during the year resulted in a $0.10 per share increment in our net asset value per share and exchange translation differences of $131 million, mainly related to assets on the Chinese mainland, which had a lower value in U.S. dollars due to a weakening of the renminbi. Overall, net asset value per share was $14.49 at 31st December 2023. Let's now turn to an update on capital management. In line with previous guidance, we endeavor to maintain a steady or increasing dividend as recurring earnings grow. The group expects the dividend to be maintained in a down year, if we consider this to be caused by temporary factors with the resulting increase in payout ratio. This is particularly evident in the past few years with our dividends per share held constant at a corresponding increase in our payout ratio to above 60% due to lower profitability. The resilience of our investment properties operating income provides stable cash flows that support our dividends to shareholders. In terms of capital deployment, in 2023, the group committed GBP 1.3 billion of capital to new projects, which is less than the annual investments made between 2017 and 2021. And as Robert mentioned, the investments in 2023 comprised residential projects in Singapore, Indonesia and China. On share buyback, the group recently concluded its share buyback program at the end of 2023, and the total amount invested in the program since it was first announced in September 2021 is $627 million, reducing the number of total shares outstanding by 5.5%. The group's capital allocation principles remain unchanged. Hongkong Land will continue to prioritize investments in new assets to drive long-term growth and shareholder value while maintaining or growing dividends per share. Investments in existing assets, including share buybacks, will continue to be viewed opportunistically. Let's take a look at our treasury management. The maturity profile of the group's debt is shown on the left-hand side of this slide. The debt maturities are staggered over a number of years and are well diversified between both banks and debt capital markets. The group is in a strong position with respect to its refinancing plans. Of the $782 million of debt due to mature this year, $400 million was refinanced in July 2023 with the issuance of a 10-year fixed rate note, whilst the remaining maturities have also largely been refinanced in recent months or will be repaid as scheduled. The average tenor of our drawn debt at the end of the year was 6.3 years, and the average interest cost was 3.9%, up from 3.3% at the end of 2022. The impact of increased market interest rates was mitigated by having 60% of our average gross debt held at fixed rates. And most of the group's borrowings are in Hong Kong dollars where we actually have a higher hedge ratio of about 80%. At the end of 2023, the group had available liquidity of $4 billion compared to $3.1 billion at the end of 2022. And our credit ratings by S&P and Moody's remain unchanged at A and A3, respectively. I'll now hand back to Robert who will close with comments on our sustainability achievements in 2023 and a few of our ongoing corporate initiatives this year.

Thank you, Craig. Moving on to sustainability. I would like to highlight a few of the group's chief key achievements over the past year. The group continued to make progress on this stability journey over the past year. On decarbonization, the group is committed to continue undertaking asset enhancements and other energy efficiency initiatives as this progresses towards its 2030 targets. Using our portfolio in Hong Kong as an example, we piloted integrated facilities management control tower technology at Alexandra House, which effectively means using machine learning to optimize thermal comfort and energy efficiency as well as to enable predictive operations and maintenance. On Scope 3 emissions, the group also took a significant step forward in tackling its embody carbon footprint from development activities by being 1 of the first property companies in the region to build measurement tools be spoke to its major construction supply chains. The group expects the integration of these tools across the design and planning, procurement and construction stages of its development projects to drive emissions reductions in the coming years. On the tenant collaboration front. The group built on its successful pilot green feet out and operations recognition scheme by launching a more comprehensive tenant sustainability partnership program at the CENTRAL portfolio in the third quarter of 2023. The program aims to deepen our collaboration with tenants on our share sustainability journey to include not only finding ways to improve our environmental performance, but also combining our assets in delivering [ one tree ] and other CSR initiatives to the local community. Moving on to ESG and Ratings. The group's continued commitment and strong performance on the sustainability initiatives has been recognized in a number of ESG ratings, especially those involving in-depth assessments requiring active participations. The group was pleased to receive the highest 5-star ratings from the Global Real Estate Sustainability Benchmark under both the standing investments and development benchmark for 2023. In addition, the group was named Global Sector Leader, Diversified Sector for the first time under the GRESB developments benchmark. Hongkong Land also qualified for the second consecutive year as a constituent of the Dow Jones Sustainability Asia Pacific Index as a result of its strong performance in the 2023 S&P Global Corporate Sustainability Assessment and was included in the S&P Global Sustainability Yearbook 2024, which recognized effectively the top 15% of the sector's participants globally. For Sustainalytics, the group obtained a group ESG rating of 17.6, i.e., in the category of low risk. Finally, on the Climate Disclosure Product, CDP, the group retains its climate change score of B. Moving on to a few of our corporate initiatives. Next, I would like to a few moments to provide a brief update of the group's digitizations and innovations initiatives. On the customer side, in LANDMARK in Hong Kong, the group use data analytics to provide insights on customer behavior and was able to target specific customers with personalized office, resulting in the LANDMARK increasing sales by over 200% during the campaign period. In addition, the group was able to use these insights to send dynamic and personalized communications content to the individual customers based on their buying behavior, which drove an 8% increase in click rate and engagement. The group also launched a new visual application tool, which provides potential tenants and customers a digital panoramic view of the commercial space on offer as well as surrounding amenities and areas. The digital twin, too, is already available on several commercial projects on the Chinese mainland, including the West Bund and is expected to be gradually available across or the group's assets. On the assets side, where the group has a long track record of reinvesting in its portfolios. We continue to upgrade our existing properties to ensure they are amongst the best-in-class. And the Hong Kong Central portfolio, the group is currently piloting a state-of-the-art Integrated Facilities Management Control Tower Technology at Alexandra House and the Central portfolio. These systems use machine learning [indiscernible] to analyze data from both from and outside traditional building management systems to optimize thermal comfort and energy efficiency as well as to enable predictive operations and maintenance. On the enterprise side, the group has been working on several initiatives to drive operational efficiency and synergies across the regions. Recent achievements include streamlining and automating property management work orders, driving efficiency, which enables our people to better serve our tenants. Separately, to embrace generative AI, the group launched its own version of ChatGPT to increase overall productivity. Experimentations and adoptions across the organization continues with the tool delivering good results and driving efficiency in content development and drafting of agreements, et cetera. Moving on to CSR. The Home fund, which is a community building initiative of the group, continues to collaborate with NGO partners to great programs, that are focused on promoting the upward mobility of youth and alleviating housing-related social issues. Since its launch in 2020, the Home Fund has invested over 100 million in various programs to foster an inclusive society. One of our flagship projects this year is Our Common Home - Extended Living Space for Subdivided Units Residents in Tsuen Wan. This is in collaboration with Caritas. What is this initiative about? It is about aiming at providing a multifunctional living space to improve the well-being of subdivided units families, benefiting over 3,000 individuals over a span of 3 years. In addition to a cash donation to support this project, Hongkong Land volunteers contributed their expertise in design and facility improvement to transform the former staff quarters of the Tsuen Wan wet market into a community hub with study areas, function rooms, kitchen and laundry facilities. Our experience with this project will provide valuable insights to the Hong Kong government pilot program on community living room, which aims also to improve the living environment of the grassroots community. Some other key highlights in 2023 would include collaborations with 21 grantees to enhance support for use through multiyear education, job readiness and work experience programs, which has so far assisted over 20,000 young individuals. Ongoing work with over 100 NGOs to tackle housing-related social issues. So far, this program has benefited also 12,000 persons. The HERE2HELP Voluntary Program, since its inception in 2021, has continued to mobilize volunteers to participate in programs such as career coaching, mentoring and facility improvement projects, et cetera. In 2023, Hongkong Land employees achieved a participation rate of 64%, a significant improvement over the prior year. During Christmas this year, Home Fund launched for its first time the Christmas trees of Home campaign, which encourage Hongkong Land tenants and business partners to support our community by sponsoring a Christmas trees in Hongkong Land Central portfolio. I will now conclude with our outlook for 2024. Operating conditions across the group's key markets are likely to remain uncertain in 2024, due to geopolitical and macroeconomic headwinds. The group's investment properties portfolio is now expected to continue generating stable returns. In Hong Kong, the challenging macro environment and persistence, high interest rates will continue to wait on office leasing momentum with any upside dependent on the pace of recovery of the capital markets activity in 2024. Rental reversions are expected to remain negative for most of 2024. In Singapore, the office portfolio is expected to continue to benefit from the positive rental reversions as economic uncertainty and inflationary pressures are offset by tight supply in the CBD area. On the retail front, having recovered from a low base, performance at the group's luxury retail portfolio is expected to remain healthy. The group will look to continue collaborating with our luxury brand partners to deliver new products and experiences to our loyal bespoke members. In development properties and improvement in contributions from the Chinese Mainland in 2024 is anticipated due to a higher number of planned project completions. The group's strong balance sheet, its reputation for quality and execution, as well as focus on premium products in selected top cities, put it in a strong position to weather the uncertain outlook across the broader Chinese property market. In Singapore, residential market sentiment is moderating, although contributions for 2024 is expected to remain stable as construction on existing projects continue to progress. Overall, we expect uncertain market conditions to persist through most of 2024, although any potential negative impact on the group's full year underlying profit is expected to be mild. The group remains in a strong financial position with a development pipeline of recurring income-producing assets to be completed over the next several years. Okay. This concludes my presentation today. It's the Q&A time. If you would like to ask any questions from anyone on the floor, please raise your hand and the mic will be passed to you. When you receive the mic, please quote your name and also the company that you belong to before you raise the questions. Likewise, for those people, raising questions through the webcast, also state your name as well as your company before writing your questions. Okay? That's the Q&A time.

This is Karl Chan from JPMorgan. I have 2 questions. The first question is about the Hong Kong office. Just curious, for this year, I think that the rental reversion may likely still be negative, right? But just curious, in terms of the magnitude, do you think that it will actually narrow in terms of the negative reversion? And then in terms of incremental demand, where do you see this incoming tenants may be coming from? Would that be coming from Mainland Chinese companies? Or would they more like expansion of existing tenants? So that would be my first question. And the second question is about our strategies and views on the Chinese Mainland residential market. In general, how do we see in terms of the margin? And would we be consider cutting prices? Because right now, as you mentioned, the sentiment in the Mainland Chinese residential market is still very weak, right? So what would be our strategy there? Will we still be investing more new land, residential projects in Mainland China?

Okay. Thanks for the questions. With regard to the Hong Kong office market about the rental -- a negative rental reversion trend, of course, just to remind everyone, in the last couple of years, we have been -- of course, the market rent has been trending down. If you talk about 2, 3 years ago, negative rental reversions extent is in the order of low to mid-teens. Last year, we are talking about roughly negative rental reversions is in order of 10% as well. Okay. Now with the market, of course, coming off from the -- from a relatively high base, what would I expect that rental reversions to be happening this year? Of course, as I mentioned in the presentation, it should remains in the negative reversion cycle. And then with the average rent, the average rent expiring rents of this year, actually quite similar to last year. And then I would expect that is probably the sort of -- unless the market returns out also significantly or remains very, very subdued, then I should expect that the level of rental reversion should not be more than what we experienced last year based on what I have just explained. That is about the -- but I would like to also comment on the -- while we are talking about the office market in Hong Kong, just to explain a little bit about our experience on the ground. When we say that, okay, we are very resilient. Of course, as you can see, our portfolio, especially the main -- the backbone of the group is of course the office portfolio in Hong Kong, I think the performance or the behavior of the top 30 tenants will give you a clue that base -- that really back up our statement that the markets or our portfolio or our income really stayed quite resilient. What happened to the top 30 tenants? What happened to them? Are they facing a lot of downsizing actions, et cetera? If you look at since the beginning of last year and then look at it from today's angle, what happened to these top 30 tenants? Two of them, out of the top 30 tenants, 2 of them has confirmed that they will be leaving us. That would constitute about 1.7% of our portfolio size, roughly. Of the remaining 28 tenants, actually, if you look at their behavior, they actually have a net increase in total requirements from the end of last year -- I mean, from the beginning of last year until now. So I think the -- from that total behavior, you could see that the -- even though the 2 tenants that's leaving us, which has been quite well known in the market already, they are not downsizing as far as we are aware. So you may say that the top 30 tenants quite reflect quite a significant part of the business sentiment. They are holding on quite strongly on a relative basis. One would say that, overall, the requirements of office space in the market is actually quite stable with no significant downsizing. There are recent news about who is downsizing, et cetera, and especially legal professions, yes, we do have legal professions also downsizing. We do have people coming in and out. But if you look at our experience, you're just assuming the legal professions, what is the experience of the legal professions actually last year. In fact, we have people leaving us downsizing. But we do have also lawyers coming into our portfolio. If you look at the net-net effect of the legal professions, it's actually net positive in terms of space requirements of the legal professions. So again, these -- I'm not trying to paint a very rosy picture about that office market. But I just want to say that -- all right, you would say that you are resilient. On what basis that you are telling the market that you are reasonably resilient? I can only highlight to the fact that with collective behavior of these major businesses, it seems quite stable. Of course, everyone is facing challenges at the moment. But it seems that the -- we have not, at least, for the time being, detected very concerning signals the -- at the moment. All right. Okay. With regard to the demand for office space, of course, one can only say, characterized, the demand is quite weak. Needless to say, inquiry levels remains quite low. Even the net space requirement per inquiry is relatively low as well. So the weak demand, I think -- I don't think that is news to everyone, the -- on that front. The -- what about the characteristics of the new demand? Mainly still legal professions, you will be amazed. And also, of course, our portfolio attracts a lot of financial tenants. So the -- in the financial sectors, the capital-related -- capital market-related entities are still mainly the main attractions to our portfolio. If we want -- I have not seen quite a meaningful return of the Mainland Chinese interest. I think I have said before that it has gone from a very, very -- they have been dominating the market for a period of time. That was quite some years ago and that has since reduced to 20% to 30% of the total market demand pattern, and that has stayed at that level. And I have not seen that demand has actually swing back to a very high level and which I think is a very healthy balance. Instead of relying on just one particular source of demand, it's quite well balanced now, I would say, which is -- I think is probably more healthy in the long run. All right. Turning to your -- another question is about the strategy on the Chinese Mainland. I think our actions speaks for itself. I think last year, we have been quite opportunistic in terms of acquisitions. We have not been too aggressive in -- I think that approach remains our attitude generally, not just Mainland Chinese market, but also around the region. I think we will still be cautious in assessing new opportunities. Margins. Okay. You asked about the question on margins. We have -- I have said the margins last year average is 19%, mainly tracked by the -- our projects in Wuhan is the only market that we have felt quite a pressure on. The rest is quite, I would say, relatively healthy, still in terms of margins. Of course, the over average last year, we're talking about 19%. I think the -- going forward, if project margins is not in the low 20%-ish, it does not worth considering at all. So as the group targets for margins for new projects, I think it should restore back to the low 20s region on the gross margin, i.e., net-net, mid-teens probably is the -- otherwise, why bother with an investment with the risk involved, et cetera. One should not be bother with too lower margins. Strategy, in terms of selling inventory. You look at the -- what happened to a lot of developers in China, they have been cutting prices. Has that generated a lot of sales? For a short period of time, yes, maybe weeks, but not sustainable periods of times. But what would be the net effect of cutting price significantly is you just erode customers' confidence in your projects, et cetera. We don't think slashing price would be a right way to move inventories. We have not done that. But you look at our share of the contracted sales last year of USD 1.5 billion versus the prior year of USD 1.3 billion, our share is actually it's an increase, but not through cutting prices. So how can you achieve that? The -- of course, our careful selection of projects in the past is important. We only look at the better projects. Then our premium positions also is very important. So we have already developed quite a reputation in the market that our value relatively holds in all circumstances. I'm not saying that we are in [ mill ] from any value for, but at least our customers say that it's good quality products, price generally hold well. And hence, that is the confidence that the -- that it's very important that we need to. But should we be insensitive to market changes that in a sense that, all right, are you living on the moon? Do you know that China has been challenging, et cetera? No, we are not living on the moon. We know that market is challenging. So our general practice is when there is an uptick in the market sentiment, that is the time to be flexible in pricing. So when you have customers through the door, you could have selective periods of promotions. But not in massive price cuts. That would be a better strategy, be flexible when you have serious customers at your doorstep, welcome them in, of course, and be flexible but not through massive cut, right? We do not believe in that. Even if you cut your price significantly, does it help? On the one hand, it erode customer's -- the confidence in you. Other projects will follow suit anyway. So we -- our product quality will always have a premium over the competitive products because if we match their pricing, they will need to drop their price. Otherwise, no one will buy their products anyway. So again, the market behavior have suggested that massive price cut does not help sales. It's continue our journey on quality, delivering the products on time at good quality. Our customer satisfaction rate is well above market. The over 90% customer -- the satisfaction rate when the market norm is 75%, mid 70s, we're over 90%. We are very conscious about these figures, independent way of our customer survey. This is important, to manage our portfolio and especially when the future of China market is about upgrade is demand. Upgrade is demand means that they are looking for more quality products. And hence, I think Hongkong Land should stick with this strategy. It works well. It protects us in all times, in good times, obviously. We have better upside in bad times like what we are experiencing, I think we can say that despite some weaker projects. But generally, we don't have huge problems.

Karl Choi from Bank of America. First of all, best wishes to Robert on long and healthy retirement, and we're missing you. A couple of questions, and I don't think they'll be too tough. First one is on Hong Kong retail. You mentioned you expect the luxury brands to continue do well. Just curious about the other parts of the portfolio, the non-luxury side, example, F&B, are you seeing any weakness from either local economy not doing well or leakage -- even leakage to Shenzhen? And -- but related to that, as you're doing some retail revamp, what sort of retail spot rent uplift do you expect? Second is moving on to Hong Kong DP. Hongkong Land hasn't done much in Hong Kong DP for the last few years. But with the Hong Kong home prices and land prices having corrected quite a bit and the Hong Kong government has relaxed pretty much all the restrictive measures, just curious if you would contemplate returning -- having a bigger presence in Hong Kong DP.

Okay. Thanks for the question. I think Hong Kong retail is, of course, one of the price spots that we experienced with the total retail sales portfolio actually have returned to the pre-pandemic record level. I think -- I won't use 2019. 2018 is actually our record retail sales. Actually, that already exceeds the total. And then we are currently managing happy problems that most of our key retail brands is asking for, expansion space. So how to satisfy everyone with a fixed size of our portfolio is a happy problem that we are managing. So the -- on the F&B side of our portfolio, F&B, to a certain extent, is -- especially in our portfolio with a lot of the fine dining offerings, invariably, it will be affected by weak macroeconomic environment, especially when the capital market when you have less IP holes, there will be less business entertainment that you would expect. So I think our overall F&B, while the retail sales, including F&B, is actually positive, we just zoom into the F&B compared with the peak, historical peak, we are some 10% to 15% down, still not yet returned to the -- which is not surprising if you ask me, I think given the current environment, but it's not significantly below what we have experienced. I would say it's very satisfactory. So I think it's partly due to the fact that we try to keep evolving our offerings, okay, for weaker spots like the basement of Jardine House, has been the weakest spots of Hongkong Land. We turn it into base hall, which is [indiscernible] the nearly F&B concept. The top floor of the Gloucester Tower, I mentioned about Forty Five, and then the Forty Five used to be just a private club. We turned it into quite a venue for public experiences, and it is very well received by the market. Early on, Alexandra House, we moved -- relocate office tenants occupying the podium floor, podium level of the -- and then turn it into 2 retail F&B concept. I think the continuous -- the creation of new F&B concepts have prevented us from suffering from a general market phenomenon of quite a significant fall in F&B. And I think we stay very relevant. And then we are not stopping here. We have big plans that is going to continue to evolve our F&B offerings going forward. Retail in Mainland. I think the -- we don't have many at the moment. But I must say that the 2 -- I think we have 2 Ring projects in operations. And one which I have mentioned about, that we have very impressive the growth in sales and also rent. And you look at the 2 Ring projects, one is the -- one is in Shanghai and one is -- and the other one is in Chongqing. Both of them registered over 30% increase in rent, average rent, throughout the course of last year. So of course, why you can achieve over 30%, it's not single digit, over 30%? And I do expect this Ring project will become the strong force of Hongkong Land upon completion, of course, in future. Of course, you need to manage it well before you can enjoy despite -- okay, market in China I won't characterize it as very strong. Retail wise, it's okay, but we manage against such an environment a strong increase in rent, so -- and I'm very positive about. But they are relatively small portfolio, but it's an indicator of the market is competitive. But you need to know your stuff, how to make it work. Then I think we have a good team in China, and I'm very confident that they will continue to perform well. The last question you have asked is Hong Kong development properties, would I invest in residential project in Hong Kong given that the -- it's probably more sensible now in terms of the pricing, da-da-da, et cetera. But of course, I think I won't rule out any market. But I continue to look at the -- is this a market that I like to sink in the chunk money and then with the payback talking about 5, 6 years? Do I really like this sort of profile when I -- my main business is to build a portfolio of rental assets over the long term? I like a class of investments that has a relatively short payback period so that I can turn around and redeploy our capital more flexibly. China still offer you quite a nice payback period, I would say still, for the -- under careful selections, 2 years max, probably, for the right selections of the projects. So I think the -- that is a very important criteria, that I like to be more flexible. I have a very strong base on capital-intensive projects. I'd like to have a relatively light -- asset-light project in a way that the turnaround time is high. And I think the -- in medium, long term -- short term is very challenging in China. But given what we have demonstrated, our capability in the market, and hence, I think I will still be more positive about the China market as a destination of our allocation if we are to invest in more residential assets. Singapore will be another destination that I think could be interesting. Now it has a very healthy profile, even though the market sentiment has moderated, which is healthy as well. I always like to think about market when the market environment is a little bit -- I'm sure management of Hongkong Land will continue this [ as still ] culture when it comes to new investment opportunities. All right. Okay.

Well, I think -- Rob, there's a couple of questions coming online. I'll take the first 2 because they're financial related. Two questions from Wen Han Chen from Principal Asset Management. The first question is how much was the mild expansion of cap rates during the year. Just to remind everybody, there was the cap rate question here related to Hong Kong office. There was no change in the cap rates across our other investment properties portfolio, whether that was retail, Hong Kong or Mainland China or Singapore. So Hong Kong office, the cap rate expanded by 10 basis points. It was quite an even expansion. There was 5 basis points at the half year in June and a further 5 basis points on the second half of last year, so 10 basis points in total. And the second question is about our funding cost. What is the company's latest funding cost at the end of last year? And how much did it change during the course of the year? We ended last year with average borrowing cost of 3.9% compared to 3.3% at the end of 2022, so an increase of 0.6%. And -- and if you think about it, Hong Kong interest rates more than doubled, and that period went up by about 2.5%, 2.6%. So that really talks to the hedging that we have in place because the -- despite interest rates doubling in Hong Kong, there was a mild 0.6% impact on average overall for us.

Any CapEx plan is basically -- is there any CapEx plan for Landmark and other Hong Kong projects? Basically, we have it. Our CENTRAL portfolio is, of course, the main investment in Hong Kong. I've mentioned about quite a lot of key retail brands wanting to expand. Invariably, we need to have some CapEx. The [indiscernible] go around. We have plans to create more duplexes store base around our portfolio to satisfy the keen demand. I think that I reserve the details on what exactly is our plan. Once we are able to really complete the jigsaw puzzle with our brands and then fund nicer plans, we will make announcement. I think one should expect that we would need to have some CapEx to satisfy the needs of the -- or to really satisfy the expansion needs of our tenants. Okay. Maybe turn around of questions from the floor? Praveen. Yes.

This is Praveen Choudhary from Morgan Stanley. Thanks for the great presentation, and also you answered a lot of questions. So maybe 1 or 2 marginal question. I have questions on balance sheet. So the first question is about your JV partner in the Bund project. We just wanted to understand the health of your JV partner considering so much going on in Mainland, in sense of -- in the sense that will it come a point where you have to take over the entire project if the partner balance sheet is not strong? So anything you can talk about that. The second question is about would you be able to share your look-through gearing, so the gearing, including associates and JV projects, if possible. And the third question is a follow-up on the other question that you tried to answer. We're trying to understand 2024 cost of debt for the company. So you mentioned 3.9% with 62% fixed rate, right? Imagine HIBOR remains at the current level of, let's say, 4.5% for the entire 2024, for argument's sake. Would your cost of debt be higher than 3.9%? Or any guidance on that?

Okay. The -- on the JV partners, you probably have picked up over the last 2 years, we have made some acquisitions of our partners' state. From day 1, we have been very careful in our partners in actions. So we don't have a significant partnership issues, even though at the beginning of the downward cycle. So the more -- I would say the more problematic projects, we have probably have done the acquisitions. The major project that the -- the most important project, of course, is West Bund. Our partner is paying an insurance. I don't think that we foresee any -- of course, it's not for me to comment about their financial positions. At least, I'm not aware that there's any issues on the partnership front with paying an insurance, which is the most significant project in China. In a bad market, you're bound to have issues with your partners. You have -- they always -- we always have difference in view on how to manage the projects. These are new thing. Would I -- we announce a lot of more acquisitions with -- on the partner state? I don't think so. I don't think the -- the more problematic one has been dealt with and then as most of our projects are equity carefully selected. The more problematic project in Wuhan is 100% owned anyway. So there is no partner in that. So that is also not an issue for us. So all in all, partner issue is quite very manageable. And I don't see that we would have a lot of opportunities coming from that direction going forward. And the other 2 relates to financial matters. Craig, would you like to take it on?

Yes. I think, Praveen, in relation to the question, our debt at joint venture level is something that we monitor very closely. It's a good question. Our debt, our share, Hongkong Land share of joint venture debt is about USD 1.9 billion. $1.5 billion of that $1.9 billion is in Singapore. And the reason we have such a large amount in Singapore is because of our joint venture office portfolio, which is One Raffles Quay and Marina Bay Financial Centre, which, just to remind everybody, is a significant office portfolio of about 4.5 million square feet. It's similar in size to what we have in Hong Kong. So the balance of debt of about USD 400 million is in China, and it's actually not that significant a number. It's probably smaller than you would have thought. So we've been very focused on managing debt levels with our projects in the Mainland. And in fact, there's a reasonable amount of cash in many of our joint venture projects. I mean, given the challenges that the markets face on the residential side, we've been very focused on ensuring that each of our joint venture projects are well capitalized. We've not been stripping lots of cash out, which is why we haven't had significant funding impacts at the group level. So I think the joint venture position is pretty robust. In terms of 2024 debt, I'm anticipating our debt costs for the year to be about 4%, so actually not that big an increase from the 3.9%. And the reason for that is that we've actually been in the process of swapping some of our Hong Kong dollar debt for renminbi debt because interest rates there, as you know, have been falling, and we've been taking advantage of that. I mean just generally on financing, Hongkong Land remains in a very robust position here. We're very fortunate to have great support from banking partners, not just in Hong Kong but also in the Mainland. So right now, we can borrow money and probably save about 2% per annum between the Hong Kong float rate and the renminbi fixed rate. So we've been doing a bit of that, which is why there's only a marginal increase anticipated in borrowing costs for this year.

Okay. Yes, please.