Hongkong Land reimagines Landmark

However, he acknowledges that Hongkong Land, the largest landlord in Central district, is a key and responsible stakeholder that Hong Kong, a Special Administrative Region (SAR) of China, treasures.

In efforts to improve the vibrancy of Central, Hongkong Land will lead a more than US$1 billion ($1.36 billion) transformation of Landmark, Hongkong Land’s largest property in Hong Kong. Landmark is a mixed-development commercial complex with retail, office and hospitality offerings owned by Hongkong Land in Central.

In a June 26 announcement, Hongkong Land says it will contribute US$400 million while the remainder of more than US$600 million will be contributed by 10 of Landmark’s long-standing luxury tenants. These include Cartier, Chanel, Dior, Louis Vuitton, Prada, Saint Laurent, Sotheby’s, Tiffany & Co and Van Cleef & Arpels, who will design and create new offerings within Landmark.

These anchor tenants will more than double their footprints to over 220,000 sq ft, elevating their retail concepts across two to eight storeys of “Maison destinations”, some of which will be the largest globally. Hongkong Land did not disclose the exact amount of total investment or the exact amount invested by the individual fashion houses.

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The Edge Singapore has contacted several of the brands but they have declined to disclose specific numbers.

Hongkong Land says the capital expenditure will be funded over three years. As of March 31, the group’s gearing stands at 16%, and committed liquidity is US$3.1 billion. The way the group sees it, the US$400 million over three years is not a large sum it worries about.

“We have a lot of recurring income from the rest of the portfolio, and we can fund it over the next three years. We also usually spend about US$50 million yearly on upgrades to our properties,” says Michael Smith, CEO of Hongkong Land.

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Preparations for this transformation have already begun and will continue to be carried out in phases.

In July, Sotheby’s will reopen its doors at the Chater House building within Landmark. In November, Landmark Mandarin Oriental will start its revamp in phases. Hongkong Land will be relocating the bar and lobby of Landmark Mandarin Oriental, as well as two of the lowest levels of the office space in Prince’s Building and Gloucester Tower, to accommodate the growth of the retail areas.

Hongkong Land says that all affected office tenants are expected to be relocated within the Central portfolio.

In a media briefing on June 26, executives from Hongkong Land articulated that the upgrade will lift its regional market share and leadership in the luxury goods segment. After the transformation is completed, Landmark will house over 200 tenants.

Smith says: “The considerable investments Hongkong Land and its strategic partners are making are not only a powerful endorsement of Central’s enduring role as the city’s iconic business and lifestyle hub but also demonstrate our shared, unwavering confidence in Hong Kong’s future as a global financial centre.”

“This huge investment will help to boost our GDP and create employment, including some rather good-paying jobs,” says Wong.

“Hong Kong will continue to open its doors to the entire world. We open our arms to tourists and investors alike to come to Hong Kong and take advantage (of what Hong Kong has to offer),” adds Wong.

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New ‘Maison destinations’

Hongkong Land rolled out Landmark in a 2012 rebrand, renaming its four interconnected shopping arcades at Landmark, Alexandra House, Chater House and Prince’s Building.

As part of the upcoming “Tomorrow’s Central” project, Hongkong Land says 10 “world-class, multi-storey Maison destinations” will be created across these four arcades. Landmark will see two Maison openings every year from 2025 to 2028.

Three destinations will be created each in Landmark Atrium, Landmark Alexandra and Landmark Prince while one will be developed in Landmark Chater. This will double the retail areas of the 10 luxury brands to over 220,000 sq ft, or 21,000 sq m.

The group acknowledges that there will be a “temporary and moderate reduction of rental income” during the upgrading. However, it expects the investment to deliver “stronger growth” in tenant sales and retail income after that.

According to the group, the drop in rental income during the revamp has been purposely measured. The group ensures that rental income is sustained, as the mall will remain open. “When the new shops open gradually after the transformation, they will bring in additional income when they’re ready,” says Smith.

According to Hongkong Land, the brands believe in the growth in luxury retail in Hong Kong and are attracted by the heritage, as well as the loyal and sophisticated customer base that visits Landmark. Despite the 10 luxury brands investing millions to grow their space within Landmark, Smith shares that after the transformation is completed, the brands will not be getting a “free rent” period or even a discount.

Instead, with the larger psf space for each brand, Hongkong Land’s rental income from these brands will increase. “There will be no discount on the rent. The brands are doing this because they want to expand their space,” says Smith.

Alvin Kong, executive director of Hongkong Land, says: “We have been in discussion regarding this investment for two years now — an investment we are engaging in to meet our luxury tenants’ demand for significant additional ultra-modern retail space and unique experiences in the heart of Central, Hong Kong.”

After the transformation project, the Central portfolio will boast 260,000 sq ft of F&B space and over 30 new and refreshed concepts. Landmark will house more than 100 F&B offerings, including its existing stable of 15 Michelin-starred restaurants and one Michelin-green-starred restaurant.

Hongkong Land says the project will include “extensive use” of green building materials, including 100% low-carbon concrete, 100% green rebar and 100% sustainable timber.

In addition, Hongkong Land says 80% of construction plant and equipment used in the project will be electric, in a bid to reduce emissions.

Upon completion, Landmark aims to secure several of the highest green certifications, including LEED Commercial Interiors, BEAM Plus Interiors and WELL.

Hong Kong retail scene

This transformation comes amid analysts criticising Hong Kong’s retail landscape. In a recent report, UBS Research’s Mark Leung, John Lam and Vera Gong expect Hong Kong’s domestic retail spending to decline by 12% during 2023–2027 due to further ease of travel, progressively worse consumption leakage, intensifying onshore retail competition; rising cross-border e-commerce threat; and sustained low base for cross-border activity.

In an almost mirror-image of Singaporeans flocking to Johor, Malaysia, for their weekend shopping, Hong Kong residents head to Shenzhen, China. The high-speed rail to Shenzhen takes 20 minutes and immigration queues into Shenzhen are shorter than those at the Singapore-Johor checkpoints, Hong Kong residents indicate.

“We forecast structural cost challenges for Hong Kong retail tenants given rigid raw material and staff costs due to labour, and we think any possible cost saving would come from saving of rental expenses; we expect some potential rent equalisation between Hong Kong and Shenzhen/Guangzhou versus the current premium of about 60%,” say the UBS analysts.

They also believe northbound consumption leakage could be a progressive process due to evolving customer behaviour and further ease of travel.

“Going forward, we expect Hong Kong customers may also be interested in middle-ticket items or services, such as healthcare, body checks and dental. We attribute the strong pick-up in northbound consumption to value for money (Hong Kong’s F&B and services prices are double to eight times Shenzhen’s but with a narrowing quality gap) and a resumption in outbound travel after three years of mobility restrictions,” say the UBS analysts in their May 22 report. In the next few years, they add, the amount of time spent on the mainland could increase further due to ease of travel.

As it is, the weekends in Hong Kong are noticeably less crowded, even more so for a long weekend with an extra public holiday. Although Shenzhen and Macau are popular short getaways, Japan and Korea have increasingly gained popularity among people in Hong Kong as options for a slightly longer getaway.

Meanwhile, retail tenants are facing structural cost challenges too. Historically, high retail rents were perceived as a key factor for higher selling prices in Hong Kong but the UBS analysts think that explained only part of the fact. They cited some restaurants in Hong Kong that are nearly 80% more expensive than in Shenzhen. “Besides higher retail rents (+60% vs Shenzhen), HK labour costs (1x) and raw material costs (2x for pork; 6x for cabbage) are also significantly higher than on the mainland,” they note.

The case for luxury and VICs

However, despite this, Hongkong Land remains optimistic. Its tenants in Landmark are primarily luxury brands. The Landmark retail segment has also built a loyal base of customers over the years. Alexander Lee, chief retail officer of Hongkong Land, shared that in 2023 alone, Landmark generated HK$1 billion ($174 million) in sales from just its top 70 customers, with the top-tier consumers spending an average of HK$1 million and purchasing items every other week. The group also shared that 80% of its sales come from local customers.

The group has also noticed that these loyal customers have increased their spending in Landmark every year, contributing to Landmark’s record sales performance in 2023.

Hongkong Land’s Smith does not see the Shenzhen retail scene as a competition for Landmark. Instead, he shares that Japan and its currently weak yen have put pressure on local luxury retail consumption. “Our customers are knowledgeable and know how to find the value they want,” says Smith, adding that the consumers search for a certain kind of experience and quality Landmark offers.

Executive director Kong elaborates that Landmark has performed robustly against a backdrop of softer conditions in Hong Kong’s retail market, with its very important customers (VICs) increasing their spending in 2024, demonstrating resilience to wider economic uncertainties and being less price-sensitive.

Referencing the group’s 1QFY2024 ended March performance, tenant and F&B sales were slightly ahead of the same period last year, which was a peak year. BaseHall, a first-of-its-kind premium food hall in Hong Kong, has been a standout performer, achieving sales growth of approximately 30% y-o-y.

Hongkong Land’s chief retail officer Alexander Li adds: “While conditions in the retail market in Hong Kong have been softer in recent months, the average spend of our Landmark VICs in our loyalty programme has continued to grow throughout 2024. This follows record tenant sales in 2023, which were up 40% year on year, and 11% up versus 2018, the previous peak year.”

On a global scale, Morningstar believes that the luxury sector is largely fairly valued, incorporating more-subdued near-term demand, which is unlikely to persist in the long term, as luxury industries usually bounce back quickly from cyclical downturns.

“Our fair value estimates are derived from long-term forecasts that already incorporated revenue slowdown from the double-digit pace seen in the past three years, as we’ve seen a strong pickup in Western consumption as transitory. That said, we don’t see the current cyclical weakening of demand to be long lasting because, based on the industry’s past 30 years, periods of subdued demand didn’t last more than two years,” says Morningstar analyst Jelena Sokolova in a June report.

Challenging market conditions for Hong Kong

In its latest FY2023, Hongkong Land recorded a loss of US$582 million, compared to earnings of US$203 million a year ago. This includes a net non-cash loss of US$1.3 billion from the revaluation of the group’s investment properties portfolio, which saw net negative revaluation movements, especially in Hong Kong, where there was a gradual decrease in valuations of the group’s prime office portfolio.

Underlying earnings, which distinguish between ongoing business performance and non-trading items, a key measure that the management considers to provide additional information to enhance understanding of the group’s underlying business performance, declined 5% y-o-y to US$734 million from US$776 million a year ago.

This brings underlying earnings per share to 4% lower y-o-y at 22.15 US cents, while dividends per share remain unchanged from the previous year at 22 US cents.

The group’s performance during the year was impacted by lower profits from development properties, despite improved results from investment properties compared to the previous year, as trading conditions in its key markets continue to be impacted by economic uncertainties and subdued capital market activity.

Earnings from the group’s investment properties business saw growth due to improved performance from its luxury retail and Singapore office portfolios, offsetting reduced contributions from the Hong Kong office portfolio.

Total contributions from development properties were impacted by challenging market conditions on the Chinese mainland, which led to lower sales and reduced profit margins. In addition, the decision was taken to impair a small number of residential projects, although this was broadly offset by net gains from the acquisition of two equity stakes in existing joint-venture projects for considerations below development cost.

The group remains focused on addressing changes in customer preferences and behaviours, as well as market conditions and is continuing to add to its suite of digital services, introduce innovative concepts, deepen collaborations with tenants and reinvest in its core assets.

When asked if the group’s decision to convert a portion of its office space in Landmark into retail was due to the declining office property landscape in Hong Kong, Kong shared that these two floors in Landmark, compared to the group’s total portfolio, are “marginal”.

As Kong sees it, office rental in Hong Kong is under pressure. It is not just Hongkong Land feeling the pinch, it is the same sentiment across the board. Kong says: “We have continually, through cycles, performed better than the market. That is the whole ecosystem that we have created.”

“While challenging market conditions are likely to persist this year, our portfolio continues to perform satisfactorily and ahead of the overall market (committed vacancy rate of 6.6% versus overall Central at 10.6% at the end of March 2024).

“So, as long as we continue to do that through cycles, we can continue to ride through the downturn and manage them better. Now, we have about 400 tenants … and an incredible array of great tenants on long-term leases. This [space conversion from office to retail] is not a reflection of the office market, but our retail tenants wanted to expand and we accommodated,” adds Smith.

Smith adds that there may also be a downturn in the Hong Kong retail market due to macroeconomic factors, but the group is standing pat on its long-term confidence in the market. “This is not a short-term investment,” says executive director Kong.

“Looking to the future, the group’s success will always be underpinned by the strength of our Central office and retail portfolio — they are equally important and are the backbone of the group,” adds Kong.

Either way, the decision to convert the two floors of office space proves to be positive, as Milton Cheng, global chair of Baker McKenzie, says he is “not surprised” to hear about the redevelopment of office space into retail.

“In Central Hong Kong, there are several new office buildings that have come up, coinciding with the time when people [are] evolving to different ways of working,” says Cheng, who also shares that several tenants have been reducing their office footprint.

While there have been some companies taking up more office space again, they are not doing so in “traditional ways” and are making adjustments to space utilisation and requirements to cater to hybrid working.

Retail, however, still enjoys healthy footfall thanks to Hong Kong’s shoppers. “What is key for Hong Kong is to try and do so in a way that can attract tourists as part of a bigger offering,” says Cheng.

Replicating success in China

Hongkong Land may have a strong foothold in Hong Kong’s Central area but the group has been looking to replicate its success in parts of China.

“China remains one of the core markets for the group as the country continues focusing on developing high-quality and sustainable urban construction to foster long-term growth and prosperity. While sentiment in the residential sector remains weak amidst a challenging economic outlook, retail has been more resilient and stable for Hongkong Land in terms of footfall and tenant sales,” says Kong.

Kong shares that the group intends to bring Central as a brand to mainland China. Its strategy is to express Central similarly to what the group has done in Hong Kong — expressing the significant project in a high-end manner. The expectations are similar to those of the group’s Shanghai West Bund financial district project project.

The Shanghai West Bund development is one of the group’s most high-profile projects, worth US$8 billion.

It consists of a public art centre designed by Thomas Heatherwick, named the West Bund Orbit; green-certified office buildings; luxury residential apartments; hotel; and Central, its flagship premium lifestyle retail series.

The mixed-use development is expected to be completed in three phases, with the offices, luxury hotels and majority of the luxury retail completed by 2027. This will be Hongkong Land’s largest single project investment ever made. The West Bund development is twice as big as the group’s Hong Kong Central portfolio in Hong Kong.

“Central is our brand to be adopted throughout mainland China in our development strategy to build up the recognition and brand equity with heritage from Hong Kong Central,” says Kong.

Both Landmark and Shanghai West Bund will form the group’s two cornerstone projects as Global Central projects — projects in one-of-a-kind locations that can support a holistic ecosystem of high-end retail, office and hotel, and with the potential to attain global significance.

Two other product lines — Mega Central and Boutique Central — support this. These product lines will be developed over time as Hongkong Land identifies new Chinese mainland cities that are significant geographically and where it can adapt to scale and composition.

In the near- to mid-term, Hongkong Land plans to roll out 10 new developments under the Central and The Ring series in Chongqing, Chengdu, Wuhan, Nanjing, Hangzhou, Suzhou and Shanghai. This will add about 3 million sq ft of retail floor space to the group’s retail portfolio in China.

On June 24, Hongkong Land announced that The Ring, Chengdu opened on June 22. The Ring is Hongkong Land’s first wholly-owned commercial property in the city, and the second in the series development after The Ring, Chongqing opened in 2021.

However, Hongkong Land was warned of an impairment of its China residential property portfolio on May 23.

“As a result of these deteriorating market conditions, an extensive review of the group’s projects is being undertaken. Where projected sales prices are lower than development costs, the investment carrying value will be impaired,” the developer said.

This is expected to result in a non-cash impairment charge of US$200 million to US$300 million, which will be reflected in the company’s 1HFY2024 results. “Accordingly, underlying earnings in the period will be significantly lower than in the same period in 2023,” the May 23 statement adds.  

The company’s investment properties segment will likely perform better due to its luxury retail portfolio across the region and the Singapore office segment, said Hongkong Land.

Overall, Kong says: “We remain confident in the long-term prospects of China. We are very pleased with our existing pipeline which includes significant, well-located projects in very strong cities. We will review and consider new opportunities from time to time, but we are not in a rush.”

Singapore office remains resilient

Hongkong Land’s presence in Hong Kong and China is significant and growing. However, in Singapore, the group is contented, for now.

John Simpkins, executive director, general counsel & South Asia, Hongkong Land, says: “Hongkong Land prides itself on providing Grade A quality and best-in-class service to our customers and tenants, and this is certainly the case in Singapore. Our centrally located Singapore commercial portfolio consistently delivers to a high standard, providing an excellent example of what Hongkong Land does best. This quality and attention to detail is replicated in Hongkong Land’s residential offering, executed by its wholly-owned subsidiary, MCL Land.”

In Singapore, Hongkong Land, through MCL, owns some of the landmark office towers in the central business district (CBD) area, including Marina Bay Financial Centre, One Raffles Quay, Marina Bay Suites, Marina Bay Residences, One Raffles Link & CityLink Mall, as well as One Raffles Quay.

This brings Hongkong Land’s total attributable interests in Singapore properties to 165,000 sq m.

On the residential side, MCL has launched several high-end condominiums in Singapore and Malaysia, including Leedon Green and Piccadilly Grand in Singapore and Sfera and Quinn in Malaysia.

MCL has four residential properties in the pipeline. Two of the properties — Pine Grove and Clementi Avenue 1 — are located in Singapore, while the other two are located in Wangsa Maju, Malaysia.

Moving forward, Simpkins says: “On the commercial side, Hongkong Land maintains an eye out for new development opportunities in Singapore — acknowledging that the supply of available sites that align with our expectations are limited. On the residential side, our developments continue to be very well received and in high demand. In 2023, MCL won two land tenders and looks forward to introducing those to the market in the months ahead. MCL continues to review the market for new opportunities.”

He adds: “In Singapore, we expect our residential portfolio to remain resilient whilst office rental reversions continue to be positive, driven by tight supply and flight to quality demand.”