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1. Will projects launched in the second half revive the housing market?

2. MTRC interim profit soars 10-fold to $1.18b

3. Hongkong Land books US$783m

4. Mandarin Oriental knocks down demolition rumours

1. Will projects launched in the second half revive the housing market?
SCMP, 4 August 2004

Derek Cheung, Head of property research, HSBC Securities (Asia)

"To answer this question, we need to understand why the housing market began to weaken in the second quarter. From August last year to June this year, the overall average house price rose 49 per cent, largely driven by speculative investors seeking to pre-empt a surge in demand generated by mainlanders and real estate investment trusts. Both have failed to crystallise.

"Supply is now excessive and the projected shortage in 2007 is less certain after a surge in housing construction.

"With a widening gap between sellers' aggressive asking prices and banks' valuations, many potential homebuyers have been thwarted by an inability to raise the down payment.

"The recovering economy and an expected return of mild inflation have yet to translate into material pay increases or enhanced job security.

"For the housing market to become active again, the gap between asking prices and affordable prices will have to narrow - requiring lower prices or higher incomes.

"Because a meaningful pay rise looks unlikely in the near term, a drop in prices is the only viable solution.

"As long as new projects are priced reasonably, the response should be positive because there is no shortage of home-purchase demand.

"Over the medium-to-long term, a sustainable recovery in the local economy, a decline in new supply in the run-up to 2007 and supportive government policies should underpin a revival in Hong Kong's housing market."

John Saunders, Head of regional property research CLSA

"Theoretically, about 11,500 residential units have pre-sale consent but are yet to be released on the market.

"But the likelihood of all units being put on sale before the end of the year is negligible.

"We have already seen developers extending their completion and sales schedules. They do not have enough product and will not rush to sell.

"I think the market has completed much of its consolidation in the past couple of months. Viewing activities by prospective homebuyers are increasing already, partly due to the 95 per cent mortgage insurance scheme and the new tenancy ordinance, which encourages investment landlords.

"In the fourth quarter, the sales market should be strong and prices will start going up again. Inflation is expected to come back to Hong Kong before the end of the year. We are now close to neutral in deflation. When inflation returns, it will push people to buy property as real interest rates will decline even though nominal rates may increase.

"In the longer term, the prospects for the residential sector look good, especially when residential supply in the next three years will drop to about 23,000 units per year.

"In the job market the unemployment rate is falling and sentiment is improving."

2. MTRC interim profit soars 10-fold to $1.18b
Dennis Eng, The Standard 4 August 2004

Mass Transit Railway Corp (MTRC) stumped even the most optimistic analyst by announcing first-half profits of almost HK$1.18 billion, up more than 10 times from a year ago, on stronger patronage and booked property profits exceeding HK$1.15 billion.

Analyst projections had ranged from Daiwa Institute of Research's HK$674 million to a UBS forecast of just over HK$1 billion. The consensus estimate was about HK$770 million, almost seven times last year's interim profit of HK$113 million. The increase was also distorted by last year's one-off tax charge of HK$300 million.

``The results were mainly driven by the booking of deferred property income and higher patronage of 12 per cent compared to last year, which was depressed by Sars,'' Tung Tai Securities associate director Kenny Tang said.

In the first half of the year, MTRC's property development profits were split between deferred income of about HK$967 million, mainly from Tung Chung projects, and sales of HK$187 million, largely residential units at Sorrento at Kowloon Station. The total is almost double the HK$678 million that was booked a year earlier.

``A minor upward adjustment is expected for the railway operator's earnings in the second half, which will be mainly driven by its property projects,'' JPMorgan analyst Edmond Lee said.

Property projects in the pipeline include the first phase of Area 86 in Tseung Kwan O, which MTRC's property director Thomas Ho said will definitely be ready for development by the end of this year. The company's 18 floors of International Finance Centre Two are also 85 per cent let.

Residential sales are key to MTRC's property-plus-rail business model as the rail operation remains loss-making and must be subsidised with property profits.

More than HK$1.15 billion of its net income were property development profits, HK$441 million came from investment properties while the rail operation recorded a loss of HK$217 million on total fare revenue of HK$2.87 billion. This is an improvement from a year ago when rail-related losses were HK$598 million.

BOC International (BOCI) analyst Manfred Ho had estimated fare revenue from both the urban lines and the Airport Express to improve by 13.79 per cent to about HK$2.92 billion. BOCI was expecting first-half profits of HK$710 million.

Passenger numbers on both the urban lines and the Airport Express reported strong growth of 12 per cent and 32.5 per cent, respectively, helped in part by the opening of the Tseung Kwan O Line in August 2002.

``Populations are growing in areas like Tseung Kwan O and people usually take the MTR so our patronage also grows. But you must remember that the rail operation is still loss-making,'' chief executive Chow Chung-kong said, ruling out near-term fare reductions apart from ongoing fare concessions. Chow cited the concessions as the main reason for the dip in average fares on the urban lines to HK$6.50 from HK$6.64 last year.

Airport Express average fares improved to HK$64.15 from HK$60.94, helping the operating margin to rise 4.7 percentage points to 55.6 per cent.

Total non-fare revenue from advertising, retail rents and other businesses jumped 13.1 per cent to HK$579 million.

3. Hongkong Land books US$783m
Dennis Eng, The Standard 4 August 2004

A 15 per cent rise in the value of investment properties held by Hongkong Land in the first six months beefed up the accounts of the biggest commercial landlord in Central by US$810.1 million (HK$6.32 billion), resulting in an interim net profit of US$783 million.

The company's first-half results in 2003 were a loss of US$773 million, although, stripping out the property revaluations, the bottom line actually improved by about one-quarter to US$104 million. Hongkong Land follows International Financial Reporting Standards, which require property revaluations to be taken to the profit-loss account.

Chief executive Nicholas Sallnow-Smith pointed to a gradual recovery in the Hong Kong office market amid firming rents and the limited supply of Grade A office space in the Central area in the near term. According to market estimates, International Finance Centre (IFC) Two is about 90 per cent let while the only other comparable space available soon are Swire Properties' Pacific Place 3 and the AIG Tower, which is jointly developed by Lai Sun Development, Singapore's CapitaLand and insurance giant American International Group.

``We need properties like the AIG Tower and Pacific Place 3 to accommodate demand for office space but we don't want so much supply as to depress rents,'' Sallnow-Smith said.

Despite the improvement in the market, Hongkong Land's rental income dipped to US$144.6 million in the first half from US$154 million a year ago. Multi-year leases signed by tenants mean that higher rents in the market do not necessarily immediately benefit the company, Sallnow-Smith explained.

Property sales contributed revenue for the first time, generating US$22.4 million. Hongkong Land sold its residential property portfolio in the 1980s but has recently returned to the market as an active player. According to Sallnow-Smith, the company sold eight houses at its Stanley Court development in the first half. Another five houses remain unsold.

As the company only books such income when it passes the title deed to the buyer, Hongkong Land could not recognise revenue from sales of the first phase of Central Park in Beijing and Ivy on Belcher's in Hong Kong.

``We sold all of phase one of Central Park but, since it is not yet completed, we could not pass the title deed in 2003. With Ivy on Belcher's, almost 80 per cent of the units are pre-sold but we could not book any of the profits as we just got the occupancy permit in July and we can't hand the units over until August, so we'll book the profits in the second half,'' he said.

The four-phase Central Park joint venture development consists of 570 units in the first phase and about 370 units in the second. Sallnow-Smith said phase two profits will definitely be booked in 2005.

The company also has a site on Victoria Road, which will be ready for development by the end of next year. Hongkong Land has agreed to the basic terms with the Lands Department and is negotiating the premium payable, he said.

Growth next year is expected to come from the unveiling in the third quarter of 2005 of The Landmark Mandarin Oriental, a 114-room boutique hotel the company is developing in The Landmark retail and commercial property in Central.

The works will result in a net addition of about 120,000 square feet of space. The company also recently signed an agreement with Louis Vuitton to expand its flagship store at The Landmark to three levels from two.

4. Mandarin Oriental knocks down demolition rumours
DENISE TSANG, SCMP 4 August 2004

Contrary to rumour, the 41-year-old Mandarin Oriental building in Central will not be demolished but will undergo renovation as soon as next year.

However, John Witt, the chief financial officer of hotel-chain owner Mandarin Oriental International, said yesterday the firm was still studying the extent to which renovation work would have to be undertaken as well as the time frame.

Although details of the renovation remain vague, sources said the hotel owner was contemplating gutting 541 rooms to create bigger spaces and a more glamorous look.

Mandarin Oriental is rising to the challenge of top-end rival Four Seasons Hotels, which plans to open a hotel and the Four Seasons Suites next year in the IFC complex, above Hong Kong station.

"We have no intention to demolish the hotel building, which is a key flagship of the Mandarin Oriental group," said Mr Witt, adding that work would not start until next year at the earliest.

He said certain facilities at the Mandarin Oriental would be enhanced, funded by part of the group's annual US$50 million capital expenditure worldwide.

Also, the Jardine Matheson Group company was on schedule to open a 114-room boutique hotel in the Landmark's Edinburgh Tower next year, Mr Witt said.

"The two [Mandarin Oriental] hotels are very different properties, which complement each other," he said. "The Landmark is a luxurious, exclusive and intimate hotel for high-end leisure travellers while the [other] is more for business travellers."

The existing Mandarin Oriental posted a dramatic recovery in the six months to June from the chill of last year's Sars outbreak.

First-half average occupancy surged to 80 per cent compared with 40 per cent in the same period last year and 68 per cent during January to June 2002, Mr Witt said.

"The recovery in Hong Kong's tourism was faster and stronger than anticipated," he said.

However, the hotel's average room rate had inched up to US$200 per room night from $190, he said.

The group's 883-room Excelsior Hotel in Causeway Bay fared even better, with an occupancy rate of 88 per cent and an average room rate that was up 10 per cent.

The successful half helped bring Mandarin Oriental International back into the black, with earnings of US$5.6 million against a net loss of $10.7 million in the same period last year. A Thomson First Call survey had forecast a full-year profit consensus of US$14.39 million.