Hong Kong Land Holdings Limited - Assignment Example

Hong Kong Land Holdings Limited (HKL) Case Analysis Explain How Functional & Economic Obsolescence have affected Assets Loss of Tenants: The Centraldistrict of Hong Kong has the highest HK$ per square meter per month than any other district (Exhibit 7A). Most of HKL's commercial assets are located in this attractive region. But the buildings are old. Most of the estates were completed between 1970 and 1985. Reducing its prices by 25% did not help HKL get a competitive advantage. The company was loosing its existing tenants and could not get new ones. One good example is Mandatory Provident fund Authority (MPFA) which occupied 30% of Landmark, one of HKL's buildings. Even though HKL gave the least bid, HKL lost MPFA to Sun Hung Kai Properties Limited because the tenant had certain technological and modern standards which Landmark did not fulfill. As a result HKL lost HK$ 900,201 per month from rental income. Threat of takeovers: Competitors believed that HKL was not fully utilizing its commercial properties. Subsequently so as to unlock the shareholder value the leading tycoons of Hong Kong tried to take over HKL. HKL sold some of its valuable holdings in order to fight of the take over. Even so two competitors, Cheung Kong (Holdings) Limited and Hutchison Whampoa Limited, managed to secure a 4.7% interest in HKL. What are the long-term prospects based on the location the real estate assets are located in Strength Weaknesses Threats Opportunities Strength Location: Of the 11 estates it owns in Hong Kong, 8 of them are located in Central District (Exhibit 3). In addition the 11 Charter Road Development property is expected to be completed in 2002 which will further increase the market dominance in Central District (Exhibit 4). It is said that Central is the 'Financial Heart' of Hong Kong. So HKL's portfolio of Commercial Assets is concentrated in a promising market. Convenience: The buildings in HKL's holdings have ease of access to every from of public transportation-the railway, airport and subway. In addition the buildings are all linked by a Central Pedestrian Bridge System which eases the movement of those who work or shop in the buildings regardless of the weather. For instance Alexandra House & Prince Buildings are linked by pedestrian walkways that run across Ice House Street. There is also a walkway that links Jardine House to Swire house and One Exchange Square (Exhibit 15) Customer Groups: HKL has managed to attract leading brand retailers. Ermenegilo, Zegna, Prada, Ralph Lauren, and Gucci are some of the international brand retailers that are entering the Hong Kong market. These companies are beginning to see Hong Kong as a good market for their files. The presence of these clients increases the marketability of its retail properties particularly in Central District. Besides the brand retailers, HKL has also managed to create a portfolio of food and beverage shops in its shopping centers. This has improved the marketability of HKL's Holdings. Brand Name: Through its promotional activities HKL has managed to redefine its role as the leading landlord. It was also successful in building up a commercial image for Central District through its partners. Its long experience in the business has enabled it to become business partners with its tenants especially in Central which it has been working since 1889 Weaknesses Age of its properties: Most of HKL's buildings are more than 20 years old (Exhibit 14). With changing modern buildings and improved technologies, most tenants are willing to pay more for new buildings. Equity Fund Raising: Although HKL is working in Hong Kong, it is not listed in the stock market of Hong Kong because of political fears. Therefore cannot fund its needs locally by issuing shares. Nature of Leases: Most of HKL's lease terms were short term. In 1999 alone, 25% of leases were due for renewal. With short renewal cycles HKL is forced to reduce its rental prices in order to retain its existing customers. Threats Economic Problems: The Asian Economic Crisis and the handling of Hong Kong to the Mainland China resulted in volatile interest rates which in turn resulted in changing of customer needs. Changing customer needs has affected their choice of shopping centers in which they work or shop in. There was also a fall in the capital and rental values of the real estates in Hong Kong as a result of the economic depression. Economic Growth: In the Kowloon Peninsula, a new emerging business city, two competitors Wharf (Holdings) Ltd., and MTR Corporation Ltd. planned to develop new buildings. The development of these properties paired up with the expansion of the physical links between Kowloon and Hong Kong will strengthen the commercial importance of Kowloon there by becoming a threat for the Hong Kong Market. The increase of office stock will also be another threat for the Hong Kong market. In 2002 the overall supply is expected to show an increase of over 60% in the supply of private offices (Exhibit 8A) Growth in foreign countries: Shangai, after china joined WTO and embraced an open door policy, became a favorable trading city. Low labor costs and its central location attract more customers from the Hong Kong Market. Singapore has also become another new attraction for clients because of its tax advantages, educated manpower, and good relationships with the labor, good infrastructure and geographical location. Shanghai's Office vacancy rate has seen a reduction from 44.5% to 39.3% in one year time. The office vacancy rate in Singapore has also reduced by 0.8% (Table A). Shanghai offices offers the lowest rental price. Its price is half of the rental price of Hong Kong Central District. Tenants in Shanghai enjoy a 30 % reduction of rental price as compared to Hong Kong Central market. (Table B). Therefore the emergence of Shanghai and Singapore as trading cities has posed a threat to the Hong Kong market. Competition: In the Central district alone HKL faces strong competition from 8 competitors (Exhibit 14). With new buildings owned by competitors HKL is already losing some of its best tenants. Rent free Periods: Customers are willing to change to modern buildings as they can compensate relocation costs with long rent free periods offered by HKL's competitors. Relocation of Tenants: In order to take advantage of low labor costs and overheads available in different cities, many tenants are moving their back office activities from Hong Kong to Shenzhen and Guangzhou retaining only the High-Value activities in Hong Kong. Opportunities Income of Hong Kong Residents and Government Policy: Regardless of the economic recession, Hong Kong residents had strong purchasing power of HK$ 193,299.00 per year which was one of the highest in the world. The Government of Hong Kong was determined to sustain its peg to the Hong Kong Dollar. As a result in spite of the economic problems in Asia, the Hong Kong dollar did not lose its values as its counterparts. Proximity to customers: Hong Kong was not affected by the online trade because the domestic neighborhoods are located near to the shopping centers. Most buildings and shopping centers are close to its customers. Increasing Market Demand: International brand retailers, like Ralph Lauren and Brooks Brothers, are coming in to the Hong Kong market. These giant companies are now viewing Hong Kong as a profitable market. Some of the existing ones like British Label Burberry are expanding. Their expansion has led to the reduction of vacancy rate in Hong Kong especially in Central district. The presence of brand retailers in HKL's holdings will definitely increase the marketability of HKL. Forecast of private rental premises shows a promising increase in Honk Kong as compared to other cities or new territories (Exhibit 12). What are the Strategic options for HKL Currently HKL is trying to develop its portfolio in the Central district. It is investing heavily on redevelopments, refurbishments and promotional activities in order to boast the marketability of Central. At the same time HKL is maintaining its market in other districts .Some other Strategic options for HKL could be: Cost Leadership: HKL could continue to use its current buildings and provide low rental leases to customers. The main target customers in this case will be small offices like doctors, lawyers, lawyers who are not willing to pay more rent for improved services. Quality Differentiation: HKL could redevelop or renovate its estates in order to attract high-end customers. Improving the quality of the buildings to modern standards could help to attract more international brand retailers. Focus Strategy: Central District has high Market. HKL's most collection of assets is in Central District. By disposing the properties in other districts, HKL could focus only on its holdings in Central District thereby dominating the real estate market in the district and reaping all possible profits. Should Real Estate Assets in the case be sold or redeveloped Provide a rationale for the decision. HKL's real estate assets should be redeveloped. Reasons are: Renovation in Landmark and Price building has shown favorable results. The take up rate in grade A offices has shown a sharp increase of more than 40%.(Exhibit 9, Take up in 1990 were about 240 and in 1998 the figure was about 240).Vacancy rate also reduced by about 20% (Exhibit 9,Vacancy rates were about 680 in 1999 and 800 in 1998). With all the proper renovations and redevelopments, HKL can take advantage of the rising take up rate and reducing vacancy rate. HKL obtains 87.1% of its income from rent (Exhibit 1). The investment & development properties of HKL constitute about 92% of the total Non- Current Assts. So selling these properties will not help to maximize the shareholder value. Read More