Hongkong Land Holdings Ltd Chief Executive Nicholas Sallnow-Smith's biggest asset, the city's largest portfolio of prime office space, is also his biggest liability, investors say.
The company's 1.4 million square meters of space -- and tenants such as JP Morgan Chase & Co, Morgan Stanley and the Hong Kong Stock Exchange -- means Sallnow-Smith has the most to lose as rents tumble and new buildings, including the city's tallest, are completed.
"You have quite a bit of supply still coming onstream," said Didier Devreese, chief investment officer at ING Investment Management Asia-Pacific Singapore Pte, which manages US$950 million including Hongkong Land shares. "That makes this market not very attractive."
When Sallnow-Smith, a 53-year-old Briton, delivers the company's earnings today, he may be forced to slash a dividend yield that has been almost double that of some rivals, analysts said. That may spark further declines in Hongkong Land shares, already down almost a third in 12 months.
Hongkong Land will probably say second-half earnings fell by 11 percent as rentals slumped.. Underlying profit for the six months ended Dec. 31 may fall to US$88 million, or US$0.38 a share, from US$99 million or US$0.042 a share -- the sixth year of decline -- according to the average forecast of six analysts surveyed by Bloomberg News. The estimates, ranging from US$71 million to US$99 million, don't include a revaluation of property by Hongkong Land as required by accounting standards introduced in 2001.
Hongkong Land's problem is falling demand for office space in a city in which the economy has posted 50 straight months of falling consumer prices. Companies have been reducing space as they fire staff and pushing for lower rents as they renew leases.
The average monthly rent for prime office space in the downtown Central district -- including at Hongkong Land's Exchange Square, Landmark and Alexandra House -- has fallen to HK$26.80 per square foot in December, from HK$39.20 a year ago.
At the peak of the property market rally in October 1997, it was HK$72, according to Colliers International. The rents may fall a further 20 percent this year, property consultants said. Vacancies are at 12 percent, compared with 2 percent in 1997. Cutting rents would cost Sallnow-Smith "more than it would cost his rivals," said Sam Ho, an analyst at East Asia Asset Management Co.
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