Hongkong Land can afford bill for $3.1b Landmark upgrades

Capex will rise in the short-term, but retail income will rise long-term.

Hongkong Land Holdings (HKL) has enough money for its retail portfolio upgrade project, says S&P Global Ratings.

On 26 June, HKL announced that it plans to invest over HK$3.1b (US$400m) to expand and upgrade its Landmark retail portfolio over the next three years. The remaining US$600 million will be co-invested by high-end retail tenants across the portfolio on the fit-outs. 

Part of the upgrades is the creation of 10 multi-storey shops and double the retail areas of its flagship retailers– including Louis Vuitton, Dior, Chanel, and Hermès.

Phase one is slated to commence in Q3. 

The portfolio upgrade will raise the competitiveness and long-term growth of HKL’s retail portfolio, according to S&P.

HKL is expected to benefit from higher retail income as well as longer retail average expiry once the upgrade is completed. The anchor tenants have on average 10-year lease commitments to HKL.

However, it will weigh moderation on HKL’s rental income and capital expenditure (capex) in the short-term.

HKL’s annual capital expenditure (capex) in 2024-2026 will still be lower than the level in 2023, however, allowing HKL to trim debt by 3%-8% each year over the period, the ratings agency said.

“HKL plans to expand and upgrade its luxury Landmark retail portfolio in Central over a three-year period, starting in the third quarter of 2024,” S&P said in a commentary.

“Over half of the participating tenants are long-term anchor tenants of HKL. Their commitment to co-invest in the upgrade highlights their confidence and HKL’s retail portfolio’s importance as a strategic retail location in Hong Kong for international retailers, in our view,” S&P added.

Beyond the upgrade plans, HKL is likely to hold back from making significant investments on mainland Chinese development properties and deleverage over the next two years. 

As a result, the landlord should be able to weather the short-term financial impact of this investment, S&P said. 

During the upgrade period, HKL will likely log a 5% to 10% loss in rental income, compared to 2023. The disruption should be manageable, however, according to S&P. 

“HK retail only accounts for about 15% of HKL’s total revenue, and the renovation will mainly be done at night and in phases,” it added.

HKL’s retail sales is also expected to remain resilient in 2024. 

“Tenants at HKL’s Central retail portfolio grew sales in the first quarter of 2024, even as broad market retail sales and luxury sales in Hong Kong fell year-over-year. We attribute such outperformance to HKL’s good location and diversified retail offerings,” S&P noted. 

“HKL is also less reliant on tourists, who have become more cost-conscious in recent years: about 80% of the retail portfolio’s sales is from loyal local customers, and only 20% from shoppers outside Hong Kong,” it added.