Champion REIT, the owner of Three Garden Road in Central and Langham Place in Mongkok, achieved record distributable income of HK$812 million ($104 million), in the first half of 2018, according to results released last week by the manager of the Hong Kong-listed real estate investment trust.
The REIT’s interim results, which were released on Thursday, show rental gains at the Langham Place Mall in Mongkok, and at its Three Garden Road office complex at the eastern edge of Central, helping Champion REIT to a 10.1 percent boost in rental income from its set of three Hong Kong properties in the first half of 2018.
The resulting 7.2 percent increase in distributable income that the listed trust will be sharing with its unit-holders, compared to the same period of 2017, has the CEO of Champion REIT looking for new ways to drive further profits from its Hong Kong holdings, while it hunts for opportunities for new projects in southern China’s greater bay area.
Shift to Services Paid Off for Mongkok Mall in 2018 1H
A big change compared to last year came from Champion’s Langham Place Mall in Kowloon’s bustling shopping hub of Mongkok, which recorded rental income growth of 12.6 percent during the period, bringing in a total of HK$464 million in income from shop rents for the first half of the year.
According to Ada Wong, CEO of Champion REIT, which is sponsored by Hong Kong developer Great Eagle Holdings, the significant increase in turnover rents is on the back of a 23.5 percent increase in sales by the mall’s tenants. The rising shop revenues were led by the performance of beauty and skincare retailers, which are accounting for a growing portion of the sales in the mid-range Kowloon destination.
“In the first half of 2018, the sales of the beauty and health care portion increased,” Wong told Mingtiandi in an exclusive interview. “Right now, the total health care and beauty portion, together with lifestyle and medical services, all of these add up to like 60 percent of the whole building.” At the end of June 2017, beauty and healthcare service providers occupied just 50 percent of the Langham Place Tower’s space.
Wong also attributed the enhanced retail rental income, at least in part, to an increase in spending by mainland visitors.
The Chinese renminbi gained over 10 percent against the Hong Kong dollar from the beginning of last year through this April, making Hong Kong purchases more attractive to shoppers from north of the Special Administrative Region’s border. With many mainland tourists frequenting the Mongkok area in search of bargains, the 23.5 percent year on year jump in turnover for Langham Place tenants far outpaced the citywide average growth in retail sales of 13.4 percent over the same period.
Office Properties Over 98% Occupied
During the first half of the year, the 12-year-old REIT saw occupancy for both of its office assets surpass 98 percent, as demand for places to park staff continues to climb in Hong Kong’s prime commercial districts. From January through the end of June, total rental income for Champion’s Three Garden Road property, which is located just behind the iconic Bank of China Tower, increased by 12.8 percent to HK$672 million and lifestyle hub Langham Place Office Tower reached HK$167 million.
According to the REIT’s interim statement, the rise in rental income for Three Garden Road was attributable to a higher occupancy rate of 98.8 percent — up from 92 percent last year, as well as to an increase passing rents, which averaged HK$96 per square foot during the period, up from HK$92.5 per square foot for the full year of 2017.
Supported by demand from Chinese financial institutions and flexible office operators, Wong expects the asset valued at HK$48.5 billion to see average passing rents continue to increase in the coming year, with spot rents now reaching HK$130 per square foot.
The REIT’s Kowloon office project, Langham Place Office Tower, saw its occupancy rate slightly improved to 98.3 percent at the end of June, precipitating an approximately 4.5 percent decrease in income from the building’s 59 storeys of office space compared to HK$175 million of taken in over the same period last year.
With total rental income for Langham Place’s office space reaching HK$167 million during the first six months of this year, Wong remains confident in the future performance of the office asset after average rents grew from HK$40.79 per square foot per month last year to HK$41.24 by the end of June.
Looking for Projects in the Greater Bay Area
As prices for en bloc commercial assets continue to climb beyond record levels in Hong Kong and the borrowing cost raising to three percent, Wong ruled out the possibility of acquiring properties in the city, and instead is following a path parallel to its rival REITs, in searching for properties on the mainland and other gateway cities.
Wong told Mingtiandi that Champion REIT is actively seeking acquisitions in different locations in China, especially the China’s Greater Bay Area, an integrated economic and business zone linking by cities in Guangdong’s Pearl River delta with Macau and Hong Kong, that is actively being promoted by both China’s central authorities and Hong Kong’s local government. However, Wong declined to name specific cities or property types that the REIT might be targetting, beyond saying that they would be continuing to look for quality assets in the region.
In May of last year, Hong Kong’s Link REIT completed its RMB 4.1 billion ($589 million) acquisition of the Metropolitan Plaza mall in Guangzhou, as Asia’s biggest REIT found its latest in a series of mainland assets.
Great Eagle, which sponsors Champion REIT and controls Eagle Asset Management, holds 65.79 percent of the listed trust, with Great Eagle chairman Lo Ka-shui also serving as chairman of the REIT.