€¢Occupancy in Hong Kong Central portfolio remains high
€¢Chater House over 50% pre-let
€¢Significant commercial site acquired in Singapore joint venture
€¢Debt profile enhanced by global bond issue
"The outlook for our core market is closely tied to the timing and strength of global economic recovery. The present period of weakness has, however, significantly deterred investment in new supply so that when demand recovers we should see a positive response in values and rentals in Hongkong Land's prime locations."
Simon Keswick, Chairman
"Despite a very competitive market, occupancy in our core portfolio held up well, and we were able to secure important development opportunities in the commercial, residential and infrastructure sectors of our business."
Nicholas Sallnow-Smith, Chief Executive Underlying earnings per share 8.94 (Loss)/earnings per share Net asset value per share 2.72
OVERVIEW
2001 saw weakening sentiment in the office market in Hong Kong, with the events in the
United States in September accelerating the decline. The effect of this has been mitigated in
Central by a lack of supply, with occupancy in high quality buildings remaining firm.
Elsewhere in the region markets were also difficult, except in Mainland China where
underlying growth in demand has continued, albeit at a slower pace.
PERFORMANCE
Net rental income was little changed in 2001 as reversions were largely neutral over the
course of the year, but higher levels of debt, following the share repurchases completed in
January 2001, led to increased financing charges. Underlying earnings, which exclude net
valuation deficit on investment properties and asset impairment provisions and disposals, fell
by 7% to US$213 million. Underlying earnings per share reduced by 2% on 2000 to
US¢8.94.
The annual independent valuation of the Group's investment property portfolio led to a net
valuation deficit of US$600 million, which under the new provisions of revised International
Accounting Standards is now taken through the profit and loss account. After this deficit and
US$29 million of asset impairment provisions and disposals the reported loss for the year was
US$416 million.
Largely due to the net valuation deficit, shareholders' funds were reduced by US$899
million, or 13%, to US$6,048 million compared with end 2000. The impact in the reduction
in asset values on net asset value per share was tempered by the Group's action in December
2001 when it bought back and cancelled a further 6.7% of its share capital at a cost of
US$295 million. As a consequence of this decrease in the number of shares outstanding, net
asset value per share at 31st December 2001 benefited by 3%, restricting the overall fall in
the year to 7%.
The Directors recommend a final dividend of US¢5.50 per share which, together with the
interim dividend of US¢3.50 per share, gives an unchanged total annual dividend.
STRATEGIC REVIEW
The Group's core portfolio of prime assets will be strengthened by the completion this year
of Chater House, at the heart of Hong Kong's Central district. The Group continues to make
strategic investments focusing on high quality assets in the best locations. These include new
developments, such as One Marina Boulevard in Singapore and the Group's new residential
site at Central Park in Beijing, and refurbishments, of which the upgrade of the Alexandra
House retail podium in Hong Kong beginning this year is the latest example. This consistent
focus on well-located prime assets continues to yield the benefits of premium levels of rent
and occupancy, together with the ability to build valuable long-term relationships with high
quality tenants.
The Group took advantage of the decline in US dollar interest rates to enhance its debt
profile. It raised US$600 million on excellent terms through a maiden ten-year global bond
issue, enabling the Company to diversify its source of debt financing and lengthen the
maturity of its debt. The Group's strong cash flow has proven its worth not only in assuring
stability of earnings in challenging times but also in securing this favourable access to
financial markets.
OUTLOOK
In conclusion, the Chairman, Simon Keswick said, "The outlook for our core market is
closely tied to the timing and strength of global economic recovery, especially in the United
States. From a medium-term perspective, however, the present period of weakness has
significantly deterred investment in new supply so that when demand recovers we should see
a positive response in values and rentals in Hongkong Land's prime locations."
CHIEF EXECUTIVE'S REVIEW
STRATEGIC FOCUS
2001 was a difficult year in many respects. Nevertheless, it afforded opportunities for each
of our three business segments to take significant steps in developing strategically.
€¢Our Commercial Property business secured a major site, in joint venture, on the
Marina South extension of the CBD in Singapore.
€¢Our Residential Property business entered into a joint venture agreement to develop
an excellently-located 300,000 sq. m site in Beijing.
€¢Our Infrastructure business, in joint venture with leading airport industry partners,
was awarded the concession to build a logistics terminal at Hong Kong International
Airport.
COMMERCIAL PROPERTY
Central Portfolio
The sharp upturn in market rents in Hong Kong's Central district that characterised the year
2000 was already slowing by the year-end. Deteriorating global financial markets weakened
demand for commercial space in the first half of 2001. Because forthcoming supply is
limited to our own Chater House, this had only a modest impact on market rents. The
psychological effect of the September 11th attacks in the US damaged sentiment further,
however, with the potential availability of surrendered or sub-let space creating downward
pressure on the market.
As was typical in previous periods of market weakness, high quality, landlord-owned
buildings have out-performed less well-located strata-titled properties. Vacancy in prime
properties in Central remains in single figures, and in our own portfolio is under 5%. With
the delay in the likely release of IFC II, the outlook for supply in the near term in Central is
even more restricted. With supply static, rents will be driven by demand, where the uncertain
outlook is heavily dependent on US economic recovery and the prospects for growth in our
tenants' businesses. For our office tenants, concentrated in the financial services and
professional sectors, China's growing need to tap global capital markets is key to a turnaround in sentiment. In the retail sector, despite the weak consumer demand in the
territory as a whole, the luxury brands, where our portfolio is focused, have performed
relatively more strongly and demand for space still exceeds supply.
If we are to maximise the value of our core portfolio, we need to ensure it remains fresh and
competitive. Our range of investment programmes supporting this goal include both visible
enhancements and equally important operational and service upgrades. 2001 saw the
completion of the renovation of the bridge network connecting our Central properties, ready
for the opening of the new Chater House at its centre. Chater House itself is more than 50%
pre-let and, together with the forthcoming renovation of the Alexandra House retail podium,
demonstrates Hongkong Land's commitment to the consistent upgrading of its portfolio over
time. Less visibly, 2002 will see the completion of a 5-year programme to upgrade the
mechanical and electrical support in the Landmark office towers, providing levels of
redundancy in power and air-conditioning capacity far exceeding the original specification of
these original buildings.
Across the portfolio, we are now building out mobile telephony and broadband networks to
provide IT and telecommunication service levels that will match or exceed the infrastructure
in newer buildings. This commitment to the provision of leading edge services and the
highest quality property management is one of the keys to tenant retention, particularly those
whose businesses depend on being able to rely on their landlord's long-term commitment to
quality services.
Other Commercial Properties
The commercial property market in Singapore in 2001 reflected the weakness of the local
economy, with softening rents and capital values. One Raffles Link, however, has
established a premium position in the market and maintained its 100% occupancy level. In
February, a consortium in which Hongkong Land partnered with Keppel Land and Cheung
Kong Holdings successfully tendered for the first site to be offered on the Marina South
extension to Singapore's CBD. The consortium will construct over 1.6 million sq. ft GFA of
high grade commercial space on the site over the next 4 years. Government approval has
been obtained for the consortium's plans for the site, consisting of two office towers. A 18-
storey, 31,000 sq. ft net floor plate will be specified to meet financial services requirements,
complemented by a 42-storey, 18,000 sq. ft net floor plate tower. On its completion,Hongkong Land will be invested in two of the largest floor plate office buildings in
Singapore.
Our two office buildings in Vietnam continue to command premium rents, although the
market has yet to show any material signs of recovery. In the medium term, the trade
agreement with the US and the more open approach the authorities are taking to the
international trading community will be positive for values.
In October, the Group announced a small investment in Gaysorn Plaza, a centrally-located
retail centre in Bangkok. The investment - which will fund the complete refurbishment of
the asset - gives the Group an effective interest of 31.5% alongside high quality local
partners. The refurbishment will be completed later in 2002, and the centre has already
attracted top quality tenants and is 60% pre-let.
RESIDENTIAL PROPERTY
The Group entered into a joint venture in May with the Vantone Group in Beijing. The joint
venture has now received initial approval for a residential complex of more than
300,000 sq. m called Central Park in the Central Business District. The development will be
built out in four phases over the next five years. Interest in the first phase has been very
encouraging, and a strong response is anticipated when pre-sales commence in 2002. At our
existing investment in Beijing at Maple Place, occupancy has been maintained at over 70%
despite the weakness in the global economy. The Group's interest in this development has
reduced from 40% to 35% following a restructuring designed to allow Rodamco Asia to take
a majority stake.
In the Philippines, our luxury apartment joint venture development at Roxas Triangle in
Manila was completed and launched in the fourth quarter. While 50% of the units have been
sold, sales activity is weak. The quality of the product has, however, been widely
acknowledged as setting a new standard in the Philippines.
Grosvenor Land, our residential property fund joint venture with Grosvenor Estates, raised
fresh capital during the year and has increased its equity funds to US$70 million. To date,
some 60% of this has been invested in 10 purchases, predominantly in Hong Kong.
- more -
In the Group's growing wholly-owned residential business in Hong Kong, the redevelopment
of our site at Belcher's Street in Western District is now under way. Demolition is in
progress and building plan approval has been obtained with completion expected in early
2004. A further site in Western, at Victoria Road, and a larger site in Tai Hang Road, where
the Group has entered into a development agreement with the existing owners, are both the
subject of planning review which will be determined during the course of 2002. While the
residential market in Hong Kong remained weak throughout 2001, the Group's residential
portfolio, both wholly owned and its interest in Grosvenor Land, is fully let and generating
acceptable yields.
INFRASTRUCTURE
In 2000, we noted our intention to add investments in the logistics field to our existing
Infrastructure portfolio. During 2001, this objective was met, with the success of the
Tradeport consortium, in which Hongkong Land has a 30% stake, in winning the concession
to build a 42,000 sq. m logistics centre at Hong Kong International Airport. Construction is
already in progress and expected to be completed in 2003. Separately, the Group has a 33%
stake in a logistics site in Penang, Malaysia. In December 2001, we complemented these
investments by signing a joint venture agreement for a 36% interest to develop a logistics
facility on the Zhang Jiang Hi-Tech Park in Shanghai. Construction is expected to be
completed in 2003.
In the port sector of the portfolio, work continues on the CT9 development where Hongkong
Land has a 28.5% interest in the ACT consortium. Although construction has been slower
than planned, this is not expected significantly to affect the timing of the delivery of the
berths which ACT will swap with berths in CT8 on completion. China Infrastructure Group,
in which the Group took a 24% stake at the end of 2000, saw rapid growth in both activity
and profit at its Zhapu facility, while the business licence to operate in Phase 2 of the Zhapu
development was obtained late in the year. Additional equity investment raised our stake in
the company to 43% by year end.
Also in Mainland China, China Water Company continued to secure good investment
opportunities, with five plants operational, two under construction, and other joint ventures
under negotiation. Central China Power faced a more difficult market. Coal prices rose, as a
result of Central Government policy to close marginal coal producers, while tariffs and
volume failed to compensate. With no significant prospects for improvement, and
consequently little opportunity for profitable growth of the business, the company's
management decided to exit the sector through the sale of individual plants. By the year end,
investor interest in the generating capacity at San Men Xia had been obtained, with
negotiation on terms continuing. Although values to be achieved on sale are not yet known,
the Group has decided to provide against the likely shortfall against carrying value in the
2001 accounts.
Winstar Communications Hong Kong, a joint venture in which Hongkong Land has invested
US$3 million for a 25% interest, was affected by the bankruptcy of both Winstar
Communications, the US-based partner, and PSINet, the wireless local loop "LMDS"
licensee on whose behalf the joint venture was building out a network in Hong Kong. A
series of steps were taken in 2001 to minimise the risks posed by these events. The LMDS
licence has been acquired from PSINet and the liabilities of the joint venture significantly
reduced. The strategic position of the business will be reassessed in 2002.
CORPORATE DEVELOPMENTS
2001 saw the Group undertake two major refinancings. In March the Group's first unsecured
syndication was signed, raising HK$6.38 billion (US$818 million) in 5 and 7 year tranches.
This was followed in April by the Group's first global bond offering. Investor interest was
strong and the planned size of the bond doubled to US$600 million. This 10-year issue,
combined with the Hong Kong Dollar syndication, raised the equivalent of US$1.4 billion
with an average life of 7.5 years.
In December, the Group purchased and cancelled a block of 165.7 million of its own shares at
a price of $1.78 per share. The opportunity to acquire such a substantial stake at market price
has enabled the Group to raise earnings and net asset value per share, and lift gearing to the
levels planned at the time of the December 2000 tender offer to buy-back up to 10% of shares
in issue.
Taken together, these transactions represent a significant step in restructuring the Group's
capital structure, raising the efficiency of the balance sheet while at the same time
lengthening debt maturities.
OUTLOOK
In conclusion, despite a very competitive market, occupancy in our core portfolio held up
well, and we were able to secure important development opportunities in the commercial,
residential and infrastructure sectors of our business. With our sound financial position and
well motivated people we can look beyond the current downturn with confidence.