Champion REIT produced a 15.7% jump in distributions to its unit holders in 2016 and the Hong Kong-based real estate investment trust’s freshly-minted CEO expects even bigger things this year.
While the REIT sponsored by Hong Kong developer Great Eagle Holdings owes much of its 2016 increase in income to improved leasing at its Three Garden Road office property in Hong Kong’s Admiralty district, the trust also controls the 56,000 square metre Langham Place mall in Mongkok and sees opportunity for growth in the city’s retail sector in 2017
Mingtiandi spoke with Ada Wong, who took over as CEO of the eleven-year old REIT last year about a potential retail rebound in Hong Kong, how mainland buyers are shifting from buying Balenciaga bags to acquiring whole buildings, and how Champion expects to follow up on their 2016 showing.
Mingtiandi: We’ve seen a lot of headlines about the pressure that retail in Hong Kong has been under in recent years. What’s the situation like now?
Ada Wong: For retail, people have been asking me whether or not retail is bottoming out or bouncing back; my person view is that retail is stabilizing. Also, for China, not allowing Chinese to go to Korea, that definitely benefits Hong Kong. It’s quite obvious that we’re seeing Chinese tourists coming back to Hong Kong. It’s too early to say that it’s a rebound, but it is stabilizing. And if you look at Chinese New Year numbers, the decline has ended.
New Retail Concepts Bringing Shoppers Back
Mingtiandi: When you say the decline has ended, is that because retailers have changed their strategy or is it because the market has found its natural level?
Ada Wong: I think it’s both. Online shopping is very popular so the retailers are adding a lot of lifestyle elements into their stores and also they are incorporating F&B elements into non-food retailers. For instance, at Langham Place we have an optician that created a crossover with a dessert store. Where normally the customers would wait for an hour for their glasses to come out, they can now sit down and have a dessert. So, definitely the retailers are changing and developing new retail formats.
Mingtiandi: So you are seeing new concepts. Is this change being driven by new retailers or existing brands?
Ada Wong: Existing retailers change a lot themselves. We have the new Lego store, and it helps the footfall, and it’s very attractive for younger people – and we have a store for fans of the Line chat app as well – that gets the young people too. Retailers are changing their mix to provide a lifestyle experience, which is helping to drive footfall and boost F&B revenues.
Mingtiandi: Is this where Champion REIT sees upside this year? The opportunity for Langham Place to outperform its 2016 numbers?
Ada Wong: I think this is key for Langham Place’s performance: We are more mass market positioning rather than luxury. So luxury is the driving factor in the drop in retail sales I would say that for the retail sales drop in the mass market has been very moderate. It has been negative, but it is improving. The position of the mall and our ability to get the big flagship shops – you know something like Lego – are critical.
Sky-High Central Rents Creating Admiralty Opportunities
Mingtiandi: The biggest reason for your jump in revenue in 2016 was the rental income at Three Garden Road. Where does your next 16 percent increase come from if you’re 96 percent occupied?
Ada Wong: For Three Garden Road, our passing rent is is only HK$78 (per square foot per month), whereas in Central you can’t find much for under HK$100 per square foot, so I think we still have a lot of potential upside from office rental revenues.
Mingtiandi: What is the supply situation like? Do you see the supply of office space remaining tight?
Ada Wong: Well, there is a lot of supply but those are mostly in decentralized areas, like Island East or Kowloon East or Causeway Bay. But right now the driving force is from Chinese financial firms, which prefer Central only, and in the short term there won’t be any new supply in Central. So in the Hong Kong office market you need to look at Central sub-market versus non-Central — which will be very different.
Ready for the Next Opportunity
Mingtiandi: In terms of development, do you see opportunities in office or retail?
Ada Wong: We are looking into development, but it depends on the opportunity. With office there are very strong options with en bloc interest from Chinese financials. Retail is reaching a bottom, so it’s a good time to start investing in it. But retail in Hong Kong is traditionally a strength, so it’s a good time to start investing. We have a very strong retail team, which just won retail team of the year by RICS, so no matter the site, they will produce a good result.
Mingtiandi: Back to the world of Central: The mainlanders are coming in, leasing a lot of space and buying up the office assets, does this make it harder for Champion REIT to expand its portfolio?
Ada Wong: I’d say from the standpoint of en bloc office transactions, it’s very challenging. The Chinese are very aggressive in terms of pricing so it will be very challenging for Champion to grow from en bloc acquisitions.
Mingtiandi: If I’m an investor looking at 16 percent increase in DPU last year, what should I be expecting from Champion REIT in 2017?
Ada Wong: Growth in 2017 definitely won’t be like 2016. It will be a lot more moderate, but we still have growth. Retail is going to be very flat, because retail sales have been dropping for 24 months. So on the property side there is a slight, moderate growth. And for the other side, the interest rates, 75 percent of our debt right now is exposed to interest rate hikes, so any interest rate hike is going to impact our DPU.