Hong Kong’s Hang Lung Predict COVID-Driven Loss in 2020

One of Hong Kong’s largest property developers, together with its parent firm, is warning of a potential loss this year as a result of the COVID-19 crisis, as the pandemic takes a toll on real estate values.

Hang Lung Properties, together with Hang Lung Group, announced to the Hong Kong exchange late on Friday that their 2020 earnings are likely to take a hit both from a shift in property valuations, and from government moves to shield businesses from rent obligations.

“The Boards expect that due to COVID-19, the 2020 financial results may be adversely affected by (i) a revaluation loss of the investment properties in Hong Kong and Mainland China and (ii) the granting of support measures (including rent relief) to the Group’s tenants in Hong Kong and Mainland China,” the companies said in a statement.

Despite the potential for loss this year, the listed Hang Lung units reassured investors that the crisis would not have a material effect on their operating cash flow, and would also not disrupt their ability to distribute dividends to their investors.

Mainland Misery Follows Hong Kong Hardship

Hang Lung Properties, which gained fame beyond its home city when it opened Plaza 66 on Shanghai’s West Nanjing Road in 2001, took in HK$4.5 billion in revenue from leasing its commercial projects on the mainland in 2019, alongside the HK$4.0 billion it achieved from its Hong Kong rental portfolio.

When it distributed its 2019 annual report on 24 March, however, the developer led by billionaire Ronnie Chan was alreadywarning of the impact of the coronavirus on its operations this year.

“Since no one knows when and how the epidemic will end, it is impossible, at this stage, to project full year results. It is possible that the anticipated rental growth in the high teen numbers may be halved or even more,” Chan said in the report announcing Hang Lung’s 2019 results and attempting to project its performance this year.

That discouraging message regarding the company’s mainland fortunes came after the developer’s 2019 experience, when it had already been forced to offer rent relief to some tenants in the face of ongoing demonstrations which shut many malls. In the wake of that movement Chan suggested in the annual report that rents at Hang Lung’s Hong Kong properties could fall 5 percent annually over the next two years.

Although the company chairman referred to rental slide as, “a somewhat harsh scenario,” Chan, who is also vice president of the Real Estate Developers Association of Hong Kong, said in the annual report that social unrest in the city would likely have a lasting effect on Hang Lung’s retail and related businesses.

Revaluation Losses on Way

With its fiscal year ending 31 December, Hang Lung has not yet put a number on any potential loss, and it still pointed to any shortfall as a potential outcome rather than an eventuality. Should a loss be incurred, however, the company indicated that it would likely be caused by a downgrade in valuations for its investment properties due to the impact of the COVID-19 pandemic on operations.

“If the weak economic environment and leasing market subsist, the appraised values of the Group’s investment properties in Hong Kong and Mainland China will likely decrease and a revaluation loss will be reflected in the 2020 financial statements of the Group,” the company said.

That prediction by Hang Lung came at the end of a week which opened with Hong Kong’s (and Asia’s), largest real estate investment trust announcing a loss triggered by a similar scenario.

At a news conference on 1 June, Link REIT revealed that it suffered a HK$17.3 billion loss for the year ending 31 March, after notching a HK$20.4 billion profit over the previous 12 month period.

With revenues for the Hong Kong-centred trust having risen 4.2 percent to reach HK$5.9 billion for the year, Link REIT’s loss was attributable largely to a slide of 11.6 percent in its portfolio valuation, with the worth of its set of properties – primarily community shopping centres in Hong Kong – sliding to HK$193 billion by the end of March.

Even before COVID-19 began making its impact felt, some of Hong Kong’s largest property developers were already facing similar valuation challenges.

For the year ending 31 December, Hongkong Land, which owns the Exchange Square complex as well as the set of Landmark properties in Central, recorded a loss of $878 million. That shortfall was largely due to lower valuations, with Hongkong Land chairman Ben Keswick warning at the time that the company expected the coronavirus to further challenge its results in 2020.