Sun Hung Kai Properties Ltd

HKEX:16

Earnings Call Transcript 2021-Q2

[Hong-ning Sum, executive]

Good afternoon, ladies and gentlemen. Thank you for joining Sun Hung Kai Properties FY 2021 Interim Result Analyst Briefing. I would like to take this opportunity to wish you all good health and prosperity in the year of ox.

As in the past, I shall give you an overview of the interim results and the performance of each business segment, followed by the Q&A section with our senior management.

First of all, I'll go through the financial highlights. Please note that all figures are in Hong Kong dollars unless stated otherwise.

For the 6 months ended 31st December 2020, the group's underlying profit amounted to $17.5 billion, resenting a year-on-year increase of 30%. The growth was mostly attributable to the increase in property development profits from both Hong Kong and the Mainland.

The reported profit for the period decreased by 12% year-on-year to around $13.6 billion after taking into account of the revaluation loss of investment properties of $3.8 billion due to lower open-market rents as compared with a net gain of $2 billion in the first half of financial year 2020.

Similarly, the underlying earnings per share was up 30% to $6.03, and reported earnings per share declined to $4.69.

On dividend, the Board of Directors has declared an interim dividend of $1.25 per share, the same as last year.

As shown on this slide, we have been maintaining the dividend policy of paying 40% to 50% of the group's full year underlying earnings. This table shows the profit breakdown by segment. The property development profit surged 81% to around $12.4 billion in Hong Kong as majority of the property development scheduled for delivery in this financial year were hand over in the first half. The profits for the period rose 65% year-on-year. Besides, property development profits from the Mainland [ drum ] over 200% mainly due to higher volume of residential units delivered.

Our rental business in Hong Kong continued to be negatively affected by the pandemic, in particular, the retail portfolio. On the other hand, the group's Mainland retail portfolio recorded strong performance, benefiting from the domestic spending boom in luxury goods in major Mainland cities. As such, Hong Kong's net rental income dropped by 8% year-on-year, while net rental income from the Mainland increased by 24% year-on-year in Hong Kong dollar term and up 20% in RMB term. The increase in Mainland's net rental income offset over 70% of rental decline in Hong Kong, resulting 2% decline in the group's overall net rental income.

The group's hotel business continued to be hit hardest by the pandemic and recorded a loss of $228 million after depreciation charge of $330 million during the period.

Profit from other business grew 11% mainly due to the increased profit contribution from business such as data center and supermarket business.

The total operating profit was up by 27% to $24.2 billion for the period under review.

For financial position, the group balance sheet remains solid. The net gearing ratio and net debt were 14.4% and $84 billion, respectively. Interest coverage was around 15.3x, and net book value per share was around $201.30. The group continues to maintain strong financial position and remain one of the best-rated developers in Hong Kong by Moody's and S&P.

Let's move on to talk about our property business in Hong Kong. As of the end of December 2020, the group's total land bank in Hong Kong amounted to 56 million square feet of attributable GFA, including completed properties of around 33.7 million square feet and 22.3 million square feet of properties under development. For completed properties, 36% is shopping malls and 31% is office. For properties under development, around 77% of the total is for residential use and is sufficient to meet the group's development needs over the next 5 years.

During the period under review, the group successfully converted a farm land into residential use with a total GFA of about 614,000 square feet. The group has around 75% stake in the development. Moreover, the group acquired an industrial site in Tuen Mun via private deal, of which the group has an effective interest of 69.9%. We plan to convert the site into office and retail uses with GFA of over 770,000 square feet.

Moving on to the property development business in Hong Kong. For the period under review, the group recognized $23.4 billion property sales in Hong Kong, up over 59%. The significant increase in profit was driven by the fact that majority of the property development scheduled for deliver in this financial year were hand over in the first half. About 1.3 million square feet of residential GFA were completed in the period, while only about 0.8 million square feet are due for delivery in the second half of this financial year. Thanks to better development margins, development profit increased by 65% to $10.5 billion.

As of the end of December 2020, approximately $26.7 billion of contracted sales were yet to be recognized.

During the period, we achieved contracted sales of $11.3 billion in Hong Kong. The primary residential market's transaction volume in Hong Kong was affected by the month-long social distancing measures. The table here shows the breakdown of the major contributors.

For the coming months, we have ample saleable resources. As shown in this map, we plan to launch 7 new projects for sale spreading across different regions in the city, with a wide range of products from mass to luxury residential as well as an industrial project. Additionally, we shall continue to sell inventories and other remaining units of previously launched projects.

Now let's move on to the performance of our Hong Kong rental portfolio. Tightened social distancing measures and cross-border travel restriction continued to weigh on the performance of the group's rental portfolio, especially selected shopping malls. The gross rental income of our retail portfolio dropped by 13% year-on-year to $4.7 billion mainly due to difficult operating environment and rental concessions over to our tenants during the period. Without $370 million rental concessions, the decline in gross rental income of our retail portfolio would have lowered to 6% year-on-year. Please note that all the rental concessions have been recognized in the period under review.

The performance of the office portfolio has been resilient. It registered year-on-year growth of 2% to over $3.3 billion, accounting for 37% of the total gross rental income in Hong Kong.

The group's overall gross rental income amounted to over $9 billion, down around 7.6% year-on-year. The overall average occupancy of our rental portfolio in Hong Kong stood at around 90%.

In view of the difficult environment, the group has made considerable efforts to support our retail tenants through a series of initiatives, leveraging both off-line and online platforms. We have revitalized outdoor spaces, introduced sports facilities for selected malls to cater for a growing appetite for outdoor activities. For example, an over 10,000 square feet of urban farm site was launched in the outdoor space and YOHO Mall in Yuen Long, and an outdoor sports zone was built at New Town Plaza in Sha Tin.

The group has raised its hygiene standards at its premises via hardware upgrades, collaborating with business subsidiary, SmarTone, to utilize 5G and advanced technology in order to provide all stakeholders with a safe, convenient and comfortable environment. These initiatives include enhancements of air ventilation systems, installation of additional contactless facilities, application of smart washroom solutions, multiple-function 5G robots and Internet of Thing. We have made good use of our online platforms, including the SHKP Malls App, to support our extensive traditional promotion campaigns and enhance our customers' shopping experience. With its membership surpassing 1 million to date, The Point by SHKP, the loyalty program under the SHKP Malls App, not only better served shoppers but also managed to drive footfall and boost sales for tenants.

Turning to the group's Hong Kong office portfolio. During the period, the performance of the group's office portfolio continued to be relatively stable despite a soft market. Hong Kong IFC and Hong Kong ICC remained the preferred choices for renowned corporation and achieve high occupancies. Despite the fierce competition in Kowloon East, the Millennium City Cluster continued to maintain satisfactory occupancy.

Complementing the existing Millennium City cluster, the joint venture development at 98 How Ming Street in Kowloon East will further strengthen the group's strong foothold in this district. Comprising about 650,000 square feet of grade A office space and a 500,000 square foot shopping mall, the project is scheduled for completions in 2023.

The mega commercial complex atop at the High Speed Rail West Kowloon Terminus comprising grade A offices and premium retail space will not only create synergy with the group's ICC and the West Kowloon Cultural District but will also play an important part to capture the business opportunities from the development of the Greater Bay Area.

This concludes my discussion on the property business in Hong Kong. Now let me talk about our business -- property business on the Mainland.

As at the end of December 2020, the group's attributable land bank on the Mainland stood at around 67 million square feet. Of these, around 16.3 million square feet was completed property and about 50.6 million square feet was properties under development.

Let's move on to the property development business on the Mainland. During the period, the group recognized close to $3.5 billion in property sales on Mainland, up over 100% year-on-year due to a high GFA book. Development profit surged over 200% year-on-year to around $1.9 billion. Major contribution came from Forest Hills and Park Royale, both in Guangzhou; The Woodland in Zhongshan; Oriental Bund in Foshan; and TODTOWN in Shanghai with satisfactory development margins. As of the end of December 2020, around $10.8 billion contracted sales were yet to be recognized.

During the period, encouraging attributable contracted sales of RMB 3 billion or HKD 3.4 billion were achieved on the Mainland, exceeding 60% of our full year sales target. The table here shows the breakdown of individual projects.

For the major new launches on the Mainland in the next 10 months, we shall launch brand-new phase of Grand Waterfront in Dongguan, new batches of joint venture projects such as Oriental Bund in Foshan and The Woodland in Zhongshan.

Moving on to the performance of our rental portfolio on the Mainland. During the period, the group gross rental income from Mainland rental portfolio increased by around 19% year-on-year to over $2.8 billion or increased by 15% in RMB term. For the retail portfolio, supported by the robust growth of luxury and retail sales at our shopping malls, the gross rental income increased 26% year-on-year to around $1.8 billion. Gross rental income of office portfolio was up 11% year-on-year to over $900 million. And during the period, the gross rental income from the Mainland accounted for 23% of the group's total gross rental income.

International travel restrictions, together with the domestic circulation mode, have resulted in a domestic spending boom in luxury goods in major Mainland cities. The group's signature shopping malls, including Shanghai IFC Mall, IAPM and One ITC in Shanghai as well as Parc Central in Guangzhou are at the forefront to capture a strong surge in retail sales.

In line with the government's dedicated initiatives to upgrade the environments in Wangfujing, Beijing APM completed a cleaning project in 2020 and is undergoing trade mix enhancement. All this will enable more to see opportunity upon economic growth.

On the office front, the group's office portfolio in Shanghai continued to perform satisfactorily even though facing keen competition. The premium office space at Shanghai IFC and Shanghai ICC remain popular addresses for renowned corporations. Offices in the first 2 phase of ITC in Shanghai were fully let.

In Shanghai, the bulk of group's mega ITC project will see gradual completion by phases over the next few years. The 220-meter tall premium office tower is scheduled for completion in mid-2022 to provide about 1.2 million square feet of grade A office space. Constructions of the remaining parts, including 2.5 million square feet shopping mall and a 370 meters tall skyscraper, is progressing smoothly.

Offices at Nanjing One IFC have achieved a committed occupancy of about 75%, while Nanjing Two IFC was just completed in the second half of 2020. The luxury Nanjing IFC Mall of over 1 million square feet is scheduled for opening in 2022 and has received encouraging preliminary leasing responses.

We have been replicating our successful model of developing integrated landmarks in Hong Kong to key cities on the Mainland. I mentioned at our FY 2020 annual results in September last year the group expected to complete attributable GFA around 12 million square feet of properties for investment purposes over the next 4 financial years. We have made good progress during the period under review with the recent completions of the 1.5 million square feet Nanjing Two IFC.

The group's core Mainland property investment portfolio was about 15 million square feet at the end of last year. This valuable property investment portfolio will be further expanded to around 25 million square feet in the next 4 years. Among this 25 million square feet portfolio, about 46% will be retail spaces.

That's all for the group's Mainland rental business.

Now I will go through the hotel business performance in the next slide. During the period under review, the operating environment of hospitality sector in Hong Kong continued to be tough amid the pandemic. The group's hotel portfolio was inevitably affected with occupancy and revenue per available room falling significantly. We have introduced a series of measures to mitigate negative impacts and further enhance operational efficiency, including creative promotional campaigns to target long-staying customers.

The performance of Ritz-Carlton Shanghai, Pudong, saw a modest improvement from trough, although it has been affected by the fluctuation of the pandemic.

We have 2 new hotels in the pipeline, including Andaz Nanjing and Four Season Hotel Suzhou, scheduled to open in the coming 1 to 2 years.

That's cover our business updates. Let me talk about the market prospects.

In Hong Kong, the various domestic external challenges brought by the pandemic will continue to weigh on the economy in the short term. For the primary residential market, solid end user demand, the low interest rate environment and the buoyant stock market will underpin the property market. However, high lump-sum transaction will be under constraint amid tight mortgage policy.

For retail sector, leasing momentum improved marginally with some new demand from retailers focusing on domestic demand. The operating environment, in particular the tourism industry, remain tough. A full recovery will be subject to the local pandemic control, mass vaccination among wider local population and the relaxation of cross-border travel restrictions.

On grade A office market, MNC are expected to remain cautious amid an uncertain macro environment. Leasing momentum may improve gradually with the economic recovery.

The Mainland economy will grow at a relatively fast pace this year, backed by its effective containment measures and dual circulations economic strategy.

For primary residential market, solid end user demand and revival of buyer confidence will support the market, while city-specific housing and land policy will remain in place.

For the retail sector, resilient domestic consumption with a swift sales rebound in luxury goods helps instill confidence in local and foreign brands. Leading luxury malls will continue to benefit from the spending boom in luxury goods with outbound travel restrictions in place.

On grade A office, keen competitions amid ample new supply, particularly in noncore areas, will weigh on the leasing performance. Attractive economic prospects may draw MNC interest in further expanse (sic) [ expansion ] in selected prime cities.

Moving on to our business prospects. Over a short term in Hong Kong, we will leverage on our ample saleable resources to launch the projects to drive sale.

We expect leasing renewals to remain challenging and rents continue to see downward pressure, especially for shopping malls -- selected shopping malls.

Hotel business operating environment is likely to remain tough as long as cross-border global travel is restricted. Having said that, the group is also well prepared to embrace for the business opportunities from the reopening of the borders and anticipated economic recovery.

For the Mainland, we believe our well-located, high-quality property investment portfolio will continue to benefit from the relatively fast pace of economic growth on the Mainland.

In the medium to longer term, we have unwavering confidence in Hong Kong. The city is well positioned under the principle of One Country, Two Systems to benefit from the continuous growth of the Greater Bay Area. We continue to develop landmark commercial projects for rents, and we have sufficient development land bank for sale in Hong Kong.

Our core Mainland property investment portfolio will be further expand from current 15 million square feet to 25 million square feet in the next 4 years. That will significantly enlarge our recurring income base from the Mainland.

The group will continue to seek land acquisition opportunities in both Hong Kong and major Mainland cities with strict financial discipline when opportunities arise.

Finally, I would like to wrap up my presentation with a message extracted from the Chairman's statement as follows.

Established for over half a century, the group has weathered many crises and cycles together with Hong Kong and is adept at turning challenges into opportunities. The group remains confident in the long-term economic prospects of Hong Kong and the Mainland and will continue to acquire land for development when good opportunities arise. With its trusted brand and strong fundamentals, including a forward-looking, experienced management team and a solid financial position, the group believes it will overcome this unprecedented challenge and become a stronger, increasingly resilient and competitive company, creating long-term value for all stakeholders.

Last but not the least, we are making more efforts on the ESG, and our latest sustainability report is now available for download on our website. You can simply scan the QR code on the slide to get a copy.

This concludes my presentation. Thank you very much for your attention. Thank you.

[Operator]

[Operator Instructions] Now let me introduce to you our panel for you today. From your left, Mr. Brian Sum, whom you just met; Mr. Christopher Kwok, Executive Director; Mr. Allen Fung, Executive Director; Mr. Victor Lui, Deputy Managing Director. The center is Mr. Raymond Kwok, Chairman and Managing Director; Mr. Mike Wong, Deputy Managing Director; Mr. Adam Kwok, Executive Director; Mr. Eric Tung, Executive Director; and Mr. Frederick Li, Group Chief Accountant. .

Before we start, I would like to invite our Chairman and Managing Director, Mr. Raymond Kwok, to share with us some key messages. Mr. Kwok, please.

[Ping-Luen Kwok, executive]

Thank you. I would like to talk about our company's interim results 2020 to 2021.

During the period under review, the COVID-19 pandemic continued erratically, and the external environment remained uncertain. Despite this, the group managed to run its businesses smoothly and achieved year-on-year growth. This growth was primarily attributable to the completion of a majority of the current financial year's development projects for sale in Hong Kong in the first half of the year. The hotel business, however, was seriously impacted by the pandemic.

In keeping with the group's core belief in building homes with heart, our staff showed great commitment to maintaining business operations throughout the pandemic. With such efforts, we were able to safeguard the health and safety of residents, tenants, customers and employees with comprehensive hygiene measures. We have also provided appropriate and timely support for tenants to help facilitate their businesses.

The pandemic has also driven the group to adopt creative and innovative ideas. We took proactive steps to better understand market trends and listen to our customers' views, especially their requirements for environmental conservation, community integration and innovative technology. These steps have helped the group maintain its market leadership by continuously improving building quality and services.

Given the pandemic's negative impact on Hong Kong's shopping mall business, the group leveraged The Point by SHKP, our loyalty program with over 1 million members. Also, we also have a variety of online and off-line promotions to drive footfall and goods sales. These initiatives helped mitigate the pandemic's impact on our mall tenants.

On the Mainland, however, our shopping malls performed well, thanks to the Mainland's effective pandemic containment and fast economic recovery. The results in recent months have surpassed the corresponding period last year. The group has been actively supporting the government's anti-pandemic measures and is pleased to see the recent easing of dine-in service restrictions in restaurants that meet reduced rates of infection. However, for the group's businesses and the overall economy to fully recover, the upcoming mass vaccination program must be effectively carried out among the wider population so as to bring the pandemic under control and ultimately allow resumption of cross-border travel between Hong Kong, the Mainland and nearby regions.

Sun Hung Kai Properties will continue to look for suitable land acquisition opportunity in Hong Kong and on the Mainland. We will also focus on developing a number of large-scale integrated landmark projects, including the project atop the High Speed Rail West Kowloon station in Hong Kong, the ITC project in Shanghai, the Nanjing IFC and the Jianghehui project in Hangzhou.

With new projects coming on stream in the next 4 years, the group's properties for rent and investment on the Mainland will substantially increase from around 15 million square feet to over 25 million square feet.

The group remains confident in the long-term prospects of Hong Kong and the Mainland. Hong Kong is well positioned under the One Country, Two Systems principle to benefit from the continuous growth of the Greater Bay Area and the anticipated recovery of the global economy. We firmly believe that Hong Kong, with its time-tested economic resilience, solid work ethics, cultural diversity and world-standard business practices, will remain a premier financial, trade and business hub for both the Mainland and the world.

Hong Kong has experienced a relatively long period of difficulties and challenges since the social incidents in mid-2019, followed by the COVID-19 outbreak that has lasted over 1 year. In the short term, the business environment is likely to remain challenging. Nevertheless, Sun Hung Kai Properties has been operating in the city for over half a century and has weathered many crises, together with the people of Hong Kong. The group is confident that Hong Kong will eventually overcome the pandemic. We as a group are fully prepared to capture the development opportunities as soon as the economy is back on track and to create sustainable value for shareholders, investors and other stakeholders. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Citi's Ken Yeung.

[Ken Yeung, analyst]

This is Ken from Citi. I have 3 questions. One is on Hong Kong resi. One is on Hong Kong office and the last one is on Mainland retail.

So first of all, it seems that the first half, the contracted sales still remain quite behind with your $35 billion target. Is management confident on achieving this target? And how should we catch up in terms of the launch pipeline for the rest of the year?

And more importantly, the recent concern of some clients will be mostly on the impact of the immigration, people leaving Hong Kong to U.K., et cetera. Will management's -- I understand from the Chairman's statement that Raymond is very confident on the longer-term outlook. But does that have some negative impact on your residential outlook, let's say, in the near 1 or 2 years? So this is the -- on the residential part.

And second, on the office. Is the group concerned on the impact of work-from-home on your office demand? And how is the latest leasing demand from MNC versus the Chinese corporate? Are you seeing -- has it been a trend for the work-from-home or downsizing in some of the sectors that has been -- that you are seeing?

And lastly, on the retail -- on the Mainland retail side, I see that you have, well, recorded a very strong growth in revenue. How was the performance of the tenant sales of your China mall? Are you concerned that the tenant sales growth or retail sales growth will decelerate due to very high -- the very tough competition in the second half of the year? That's it.

[Ting Lui, executive]

Yes, on the sales in Hong Kong, as you know, our marketing of new projects was indeed a bit affected by the pandemic in last year. But projects like the Wetland Seasons Park and Regency Bay were all very well received. And in the next 10 months, we shall have a number of projects to be launched, namely the Prince Central, which we are marketing now; and then next month, that would be Phase 2 of Regency Bay and also our luxury project in Sha Tin, St Michel. And in next quarter, that would be Yuen Long Station project together with Phase 2 of Victoria Harbour and also the Wetland project, Lot 33, together with our JV project in [ Belle District ]. So again, you can see that in the coming months, we shall have quite a number of projects to be market that would deliver sizable liquidity for the group. And we are still maintaining that we are very confident to achieve $35 billion of sales target in Hong Kong.

Having said that, as you know, the sales concern may be some slippage due to the partial lockdown of the government departments recently. So that may unavoidably affect our contracted sales in first half of this year. But we are confident that we can catch up in the next 2 quarters.

For the Hong Kong office, I think the leasing -- the office leasing have been quite affected by the pandemic that caused a weakened leasing demand and also a higher vacancy. And some of the MNC are now holding back their expansion plan and -- but those companies in financial services are less affected. Like One and Two IFC, we are almost fully let. And in fact, for core location and including Tsim Sha Tsui, limited supply in the next 2 to 3 years. We continue to have a strong support on rental. As for ICC, we are doing a premium rent in the whole locality. And in fact, the location of ICC will further be enhanced in terms of accessibility and vibrancy due to the High Speed Rail and also the future West Kowloon Cultural area.

As for -- on core location, as -- like Kowloon East, as some of the companies are involving in trade-related sector, that may affect their business due to the macroeconomic uncertainty. But existing building like ours are not affected because most of our tenants are quite sizable and belonging to renowned corporations in different sectors. They are very stable and very demanding on building quality and also management services. And especially, they also appreciate our attentive service on health and safety. So our buildings in West Kowloon are still in very high occupancy, including those in Wan Chai, Causeway Bay.

But I think that overall, the rental growth in core location will slow down, but buildings like One and Two IFC and ICC will be less affected because a majority of tenants are involving in financial services.

As for noncore offices, I think sentiment may remain quite subdued in the coming months until economic confidence recovers. But as I said, existing buildings like ours in Kowloon East will be less affected. Thank you.

Regarding the work-from-home, I think in contrast to other major cities, I think the work-from-home -- the impact of work-from-home on office leasing demand is a bit overplayed in Hong Kong. As we know, we have a very efficient transport network and our leasing area are relatively small. And together, there's a need of social contact in order to enhance productivity. These are the factors that all in favor of a return to the office after the pandemic. Thank you.

Regarding the impact of local immigration on the residential market, so far we do not see there's any impact on the residential market. For the primary market, it is still resilient and in buoyant sentiment. And for secondary market, we have seen, in many cases, that those apartments being re-leased by the people who are planning to leave were being snapped up quickly in the market, and prices remain very stable. Thank you.

[Yuk-Lun Fung, executive]

Yes. In terms of our company's shopping mall sales in China, we've seen a very strong rebound in the second quarter in China. And so overall, as a whole in the year, we've seen very high overall average sales growth. And our rental income is up 26% year-on-year in Hong Kong dollar terms, and mall will still remain reasonable occupancy costs during this period.

And based on our observation, we've seen a lot of international brands are actually allocating more resources to increase their exposure in China via store expansion and also global first launch events.

And so we feel that as the domestic circulation development continues in the Mainland, we expect the growth momentum of domestic consumption to continue over the long term. And we also think that with the excellent location and excellent connectivity of our shopping malls in key cities, we are well poised to capture this rising trend.

[Operator]

Our next question comes from Justin Kwok with Goldman Sachs.

[Justin Kwok, analyst]

A couple of them perhaps. The first one is a follow-up on the residential side.

You talk about the sales target in terms of the appetite to continue to sell. Can you also comment a bit on what kind of margins or the margins outlook that you think you can achieve from now on? That's the first one.

The second question is on the land banking side, particularly on the farm land conversion or the potential pilot land sharing scheme coming with the government. Can't you kind of discuss a bit of update on what's happening there? It has been more than a year when the Chief Executive first announced it. Where are we at the moment?

I guess the last part is on the China. Aside from the malls, you got a big project, ITC, happening in Shanghai. Can you comment a bit on the progress? And at the end, what kind of aggregate contribution shall -- and just to be looking at from ITC and also from your entire China rental portfolio if and when all these are completed?

[Ting Lui, executive]

Yes. On the local sales, as you know, our strategy is always sticking to the prevailing market condition. Over the years, you can see from our past record that we can always strike a balance between volume and margin. And normally, for mass projects, we are looking for a quicker turnover. And as for the luxury project, which may need more time to absorb, we shall dispose at our pace.

And as you know, the land prices remain very firm, and developers are still difficult to acquire tender size. so it is unlikely that anyone would cut their price in order to boost the sales. So I think in the coming new projects, the pricing would remain solid and stable.

Although the price momentum had been slowed down in the past 2 years due to the social incident and the pandemic, but for our projects, that in the coming 2 to 3 years, we shall expect a satisfactory profit margin for our new launches. Thank you.

[Chik-Wing Wong, executive]

On the subject of land banking in Hong Kong, there are 2 areas. One is the farm land conversion. As you appreciate, we have done a conversion in Siu Hong, well, in Tuen Mun area of a size of about 0.6 million square feet, of which we have got -- Sun Hung Kai owns 75%. This is good sign that government has actually -- as confirmed by yesterday budget, government has actually allocated more resources to process the land application. And there was an office called Project Facilitation Office that was set up between government system to try to process and give priority projects for units more than 500 units. And most of our projects are of a sizable project that exceeding the 500 units.

We'd like to advise -- or advise that there are actually 2 or 3 cases, yes, in our pipeline which had reached a very advanced stage of negotiation. That means planning is all done and is actually premium stage. And we hope that there will be 2 or 3 cases can be concluded within this coming financial year.

And on the other hand, for the land sharing scheme, as advised last time we met the -- yourselves, we have identified a potential case and started the dialogue with government. And we hope government can start up -- or speed up the process to proceed these kind of projects. Understand there were a few hurdles to go through, but we're still actively pursuing to try to convince government to try to make the scheme workable. We are doing one actually.

[Ping-Luen Kwok, executive]

And Justin, on your final question about the investment properties under development on the Mainland, we have about -- roughly about 10 million square feet to be completed within the next 4, 5 years. We expect to generate about RMB 3 billion to RMB 4 billion, yes, from these projects, from this additional 10 million square feet under construction. Thank you.

[Operator]

Our next question is from Karl Choi with Bank of America.

[Karl Choi, analyst]

I have 3 questions. One is on the dividend policy, yes. For fiscal '20, the payout was already towards the high end of your 40% to 50% range, and the development sales in Hong Kong have been impacted by the pandemic in the last 18 months. And so just wondering, if earnings suffer a temporary drop, and would you consider sort of raising your payout ratio to over 50% in order to maintain a stable dividend?

And then a couple of questions on the operations. One is on the Hong Kong side. Can you talk a bit more about the retail sales performance in the second half of -- or I should say the first half of your fiscal year and the regional rent relief that you provided and the expectations for rental reversions going forward?

And then lastly is on China office. We've seen a lot of news about the weak office spot rent trends and high vacancy. Can you talk a bit about your occupancy right now in China in office? And do you see the risk that the occupancy will drop or the rental income could come under some pressure in the next year or 2?

[Ping-Luen Kwok, executive]

On the dividend policy, our policy has always been try to maintain a stable dividend, stable absolute dividend. At the same time, we also want to make sure that our leverage is not too high, right? So that's why the policy has always been try to keep the dividend payout ratio from 40% to 50%.

On your question about the impact of the pandemic, surely I think it has impacted on our presale dates for our property projects. Our profits are recognized upon completion, not upon sale and purchase agreement. And at this moment, we don't foresee too much delays on the projects that we have already presold. So the fact that our presale has been delayed may affect our profits 1 or 2 years from now but not the next 12 months, yes.

You on the retail...

[Kai-wang Kwok, executive]

Sure. Yes, on the Hong Kong retail side for the -- so this is calendar year -- for the second half of 2020, the calendar year, we've seen a slower rate of decline in tenant sales compared to the first half calendar year of 2020. We've also seen that the impact from the recent fourth wave of outbreak on tenant sales has been less serious versus the previous waves of outbreaks. And we think that given that we have a high-quality mall -- shopping malls and services and good locations and also our leasing teams' strength in optimizing the tenant mix, I think we are able to -- we have been able to maintain satisfactory occupancy during this period for our retail portfolio. I believe also, as Brian has also mentioned just now, we have been actively trying to alleviate our tenants' pressures through short-term leases and rental concessions where appropriate. And so overall, the gross rental income has dropped 30% in the second half of last year. But if you exclude the one-off concessions, you -- it becomes a 6% drop.

And recently, we have seen a good traffic flow at our shopping malls during the Chinese New Year. And it's also encouraging to hear about the government's plan to offer the $5,000 electronic consumption vouchers in the latest budget speech. So going forward, we believe the performance of the retail portfolio should improve once the pandemic is contained and the vaccinations get started and, most importantly, once the cross-border travel restrictions are relaxed.

[Ping-Luen Kwok, executive]

On the Mainland office, even though there are a lot of supplies in major cities, we believe that for the projects we have already now and also projects under construction, we believe our location is so good that I think there should be no major problem trying to fill up those premises, yes. Thank you.

[Operator]

Next question comes from UBS' John Lam.

[John Lam, analyst]

I have 3 question here. The first one is regarding on the management view on the cross-border activities normalization and also how the management expect about the magnitude of the recovery regarding on the retail sales.

Second is regarding on the latest plan for the high-speed railway commercial land sites.

And the third one is probably the recent -- the Mainland China policy or the land supply plan. So basically, it's about concentrated or centralized land supply plan. So do management see that this may be opportunity for the company to buy land in Mainland China given that the Chinese developers are suffering from the fee tightening?

[Ping-Luen Kwok, executive]

I think on the final question, it's still too early because like you, we have only heard about this, this morning, right? But I think for -- I believe that for the Mainland, we have an advantage that we would like to build an integrated project, whereas a lot of the Mainland developers are -- they prefer to build residential rather than an integrated project for rental. So I think we believe that our distinguished skill would be more on the integrated project for long-term investment.

Adam, cross border.

[Kai-Fai Kwok, executive]

I think everyone knows if we have the fortune to go to the Greater Bay area. But -- now the overall consumption is very healthy, especially calendar year second half of 2020. It's a bit of a tale of 2 cities. And so we see it not only in retail in our malls in Guangzhou, but we also see it in the hotels in there. And not only that, but we see the same trends in Shanghai and even more in the malls and luxury brand.

And so as to when the border will open up, we don't know. It's anyone's guess. But of course, we urge that as vaccination becomes more prevalent, that they'll be -- open up sooner than later. But I would say the group overall is very ready to capture the opportunity, be it in our malls in Hong Kong, be it in Victor's sales, especially the premium ones, our Central Peak, our North Point and so on and be it in our hotels as well. And so yes, I think it will be a game changer when things go back to normality.

[Ping-Luen Kwok, executive]

Yes. Thank you.

[Kai-wang Kwok, executive]

I'll just...

[Ping-Luen Kwok, executive]

Sorry.

[Kai-wang Kwok, executive]

I just may add a little bit to that because I think we -- once the border is open, I think we are especially confident that those people who are living in the Greater Bay Area will come back to Hong Kong, shoppers. I think we have good service quality in Hong Kong. And also, the renminbi's appreciation against HK -- the Hong Kong dollar actually makes it very attractive for mainlanders to come back to Hong Kong.

And building on Adam's point, I think we've seen actually a very strong rebound in both hotels and shopping mall sales in the Greater Bay Area. And we believe this is part a reflection of pent-up purchasing power of people living there. So once we can open our borders, we believe Hong Kong will again become the preferred destination for mainlanders to come and shop, yes.

[Chi-Ho Tung, executive]

Yes. Actually, we had -- we did a Section 16 submission 2 months ago. And I think that you have read that it has been disapproved by the government. But we are actually improving the scheme based on government's comments, and we will do a resubmission pretty soon.

[Operator]

Due to the time constraint, we will take the last 2 questions. Next question is come from Praveen Choudhary with Morgan Stanley.

[Praveen Choudhary, analyst]

Three questions from me. First one is on dividend, if I may still try.

It seems like your China business is doing very well, retail business. Hong Kong office is doing very well. And it seems like Victor is very comfortable with the contract sales target. Should we expect dividend to grow in FY '21? Or do we need to wait for a couple of years when the China rental business from ITC and others comes through? That's the first question.

The second question is related to the gearing level and noncore assets. I was wondering if you have more noncore asset disposal and plan to maintain both land acquisition as well as keeping the gearing down.

And then the last question is about this whole IP revaluation loss this year, which I'm assuming is driven in Hong Kong. What's the outlook going forward in terms of the rental outlook so that the revaluation losses will be considered in FY '21 or not?

[Ping-Luen Kwok, executive]

Sorry, can you repeat your third question again? Sorry, Praveen, yes. Your third question, yes.

[Praveen Choudhary, analyst]

The third question was related to the IP revaluation loss. I just wanted to get the outlook going forward considering in Hong Kong, we are still facing some issues in retail business.

[Ping-Luen Kwok, executive]

I'll respond to your final question first. On the revaluation side, the revaluation is down because the rental has gone down a bit. And we always try to maintain a conservative policy of using the same cap rate as before. But as you know, with interest rates going down, the cap rate should have gone down, too. But we're just being cautious.

On the dividend side, I think we have -- we're going to have more investment income over time. At the same time, to finish those new investment projects, we need a lot of CapEx. So therefore, I think -- at the same time, I think that we also want to maintain our gearing to be at or below 20% debt-equity. At the moment now, debt-equity ratio is 15 -- that's just less than 15%. So therefore, I think we have 2 considerations, right? Firstly is try to have a stable dividend over time rather than have a volatile dividend stream. And secondly, at the same time, we also want to make -- well, want to ensure that we keep the debt-equity ratio to be at or below 20%. I think it's important to maintain a good credit rating in this uncertain global situation, yes.

[Operator]

So we will have the last questions from HSBC's Raymond Liu.

[Wai Ming Liu, analyst]

So I got 2 questions. So first question is about your land bank opportunity. So there are quite some change -- policy changes recently in especially Mainland China, and we note at some of your peers have turned more active in producing the land. So the question is, how do you see the land banking opportunity in Hong Kong and Mainland China? Especially in Hong Kong, how -- can you like discuss further in terms of like mass market and also the luxury residential side? That's the first questions.

And the second question is about our market opportunities in Mainland China. So a couple of policies here already happened, including the free rent, right, policies. How does Sun Hung Kai will grab this market opportunity to like beef up and expand? And will there be any impact on your sales or other operation as well?

[Ting Lui, executive]

Yes. As you know, we normally, on all the land sales we participate actively, regarding it is leisure, mass or luxury or even commercial. And of course all our decision are under a prudent financial discipline. And as the land sales market remain very competitive, we shall continue to be more active on farmland conversion and also negotiation -- to speed up negotiation with government on premium.

[Ping-Luen Kwok, executive]

And on the Mainland land bank situation, we're only focusing on the Tier 1 and Tier 1.5 cities. We want to focus only on the prosperous cities. And we believe we are not really competing that much with Mainland developers because our focus would be more on integrated project with a hotel, office and mall. And we are going to be very selective on the location.

And from what I observed for the Mainland developers, they would be very much prefer to put their money in residential projects so that they can turn faster so that they have the firepower to buy more land in the future, whereas we want to select the best location in the best city with scale so that we can nurture the investment properties over time to make it the landmark in those cities that we are investing.

[Kai-Fai Kwok, executive]

Can I add the land reform, obviously, everyone reads it on Bloomberg, right, and there's a big speculation. But I would like to say, at least according to the news we read, it is -- the land reform they are doing is only for residential land for the 22 cities. And so they will come out in 3 batches and more concentrated bets, and they will require higher down payment. And so maybe it will favor the bigger players. But in any case, as our Chairman say, the residential game in China is not really our focus. Even if we do it, it's more part of an integrated project in a very good location that we do. So it's not too relevant to us, I would say, but good for the market, I believe. Good for the healthy market, right, for the 3 red lines and all that, everything.

[Ping-Luen Kwok, executive]

I would like to add one final point. Given the low interest rates environment in Hong Kong, given the booming stock market and new economy shares, it seems from talking to friends, most of the young guys have made a lot of money, it seems. And Shenzhen is prosperous because of Shenzhen's strength in the new economy, in the IT area, right? So we believe that when the border opens up between Shenzhen and Hong Kong, there will be a lot of visitors from Shenzhen, also, of course, from Greater Bay, but I foresee that the Shenzhen young people are -- who are working in new technology companies, they are going to have a lot of wealth derived from the shares market. Of course, some of them work for a lot of these start-ups, which could be very profitable, yes. Thank you.

[Operator]

As this is the final question and it concludes our presentation and briefing session today, thank you very much for joining us today. We appreciate your time and look forward to speaking to you soon. Hope we can meet in person next time.