Rent seekers

Challenging conditions, says Chan

He sat on Enron’s board at the time of the energy giant’s collapse, which might suggest that Ronnie Chan isn’t the first person you might think of to identify financial risks.

However, an 8,000-word missive by the Hong Kong tycoon has been doing the rounds in China’s business circles and in online financial discussion groups.

Why so? Because in his latest letter to shareholders the property tycoon is offering a relatively gloomy outlook on the Chinese economy and the risks it poses.

Chan is the chairman of Hang Lung Properties. Five years ago the Hong Kong blue-chip was one of the cheerleaders for Chinese real estate, investing more than HK$50 billion ($6.4 billion) in commercial properties across several of China’s major cities. But that strategy has recently faced economic headwinds. Thanks in part to a slowing economy, Chan notes that a slew of malls and department stores have closed across the country.

“Within six months of our opening of Tianjin Riverside 66 [one of Hang Lung’s shopping malls] last fall, at least six sizeable retail outlets in the city had closed down,” the deflated developer warned.

Hang Lung has new malls in Dalian and Kunming due to open soon. But Chan’s main message is that his firm will outlast its rivals because it has a business model focused more on shopping malls than department stores, and concentrates on customers at the luxury level, rather than mass market.

When Xi launched his graft-busting campaign in 2012, the prospects for the luxury brands in China took a hit – as did those of many of the landlords like Chan running the shopping malls that house them. Worse still, as far as the property bosses are concerned, the anti-corruption drive doesn’t look like a blip, instead being enshrined as part of China’s “new normal”.

Chan recognises that the anti-graft campaign is having an impact, and says that the plunge in the local stock market hasn’t helped with consumer sentiment either.

But he also believes the rental market will recover, especially once taxes on luxury goods are reduced in China, bringing back a large share of the shopping for leading brands currently being conducted overseas.

The rising popularity of e-commerce offers another structural challenge for mall operators. As WiC has pointed out before, competition from the likes of Alibaba has hit conventional retailers, creating huge problems for what Chan refers to as the “glut of inferior retail space”.

Many of these malls are now being closed down. “To figure out an alternative use will tax one’s ingenuity,” he ponders. “One possibility is to turn them into old folks’ activity centres. Given an aging society, there will be considerable demand for such facilities. However, how to make money therefrom is another issue. Retail rental is among the highest yielding for any space, which means that most other usage, if not all, will bring inferior returns.”

Chan says Hang Lung has chosen its strategy and now it’s a case of sticking with it.

A property firm undergoing a more radical transition is Beijing-based SOHO China, the country’s largest office developer. Three years ago it announced it would stop selling its developments and move to a “build-and-hold” model, transforming itself into a landlord (see WiC161). Analysts predicted a plunge in revenues as property sales all but disappeared. Sure enough, income for the first half to June slumped more than 90% on last year to a meagre Rmb393 million ($61 million).

SOHO has since announced another strategic leap with a plan to harness more of the productive power of the internet.

In February this year it launched an office-sharing programme called SOHO 3Q, offering space to startups on flexible rental terms (see WiC273). And this month it said it was stepping up the initiative with an online platform that allows tenants to book space directly. Prices are quoted in realtime and there are no middlemen fees.

In a further twist to the approach, anyone can join SOHO 3Q as an agent and help to rent its office space. Successful participants get as much as 8% of contracts as commission, with up to 40,000 units of office area available for lease by 2016, the company said.

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