Rumor Has It: China Resources to Acquire Its First K11 for HKD 9 Billion—Will New World Sell?

According to the latest reports from Hong Kong media, K11 Art Mall, located in the core area of Tsim Sha Tsui and owned by New World Development, has recently received an acquisition offer from China Resources Land. The reported acquisition price is approximately HKD 9 billion. As of the time of writing, neither party has commented on the rumors of the deal. Given how profitable it is, would New World really sell?According to public information, K11 Art Mall is the first project under the K11 brand, which is controlled by Zheng Zhigang. Since its opening in 2009, K11 Art Mall has undergone several rounds of adjustments and is currently operating well. Notably, in the 2023 fiscal year, the overall occupancy rate of K11 Art Mall remained close to 100%, with sales increasing by over 40% year-on-year. The mall’s foot traffic hit a new high in December 2023 since its opening. Additionally, it is reported that the mall generates monthly rental income of over HKD 40 million.According to New World’s 2024 interim report, the group achieved revenue of RMB 15.51 billion, a decrease of 25.12% year-on-year. The net cash profit from operating activities was a negative RMB 5.25 billion, a decline of 332.32% year-on-year.

The group’s net debt ratio stood at 49.9%, up 2% from the previous year. While a 49.9% net debt ratio is considered manageable for large corporations, it marks a continuous increase in New World’s debt ratio, nearing the 50% threshold. Reducing the net debt ratio has thus become a priority for the company.During the earnings conference, the management indicated that New World would continue to deleverage by selling non-core assets and focusing on its core businesses. The company plans to lower its net debt ratio to below 40% by mid-2024, with a target of RMB 8 billion in sales from non-core assets in the 2024 fiscal year.Before K11 Art Mall, New World had already sold its entire stake in Tsuen Wan’s Citywalk Mall and parking facilities to Hua Mao Group for HKD 4.02 billion. It also sold the commercial portion and 52 parking spaces of the Sai Kung Aoling Mall to Shenzhou International for HKD 115 million. However, given the strong profitability of K11 Art Mall, it doesn’t seem to fit the “non-core asset” sale category. Could this be an opportunity for China Resources Land to gain favor?In light of the current pressure on Hong Kong’s retail sector, the commercial market in Hong Kong is no longer as prosperous as before.

According to the latest “Retail Leasing Report for July 2024” from Savills, rental prices for core street shops in Hong Kong have fallen by 50% since their peak in 2019. As of Q2 2024, base rents for major shopping centers continued to decline, down 4.6% quarter-on-quarter, following a 0.8% drop in Q1.Although K11 Art Mall is still one of the top-performing commercial properties, the unpredictable commercial environment creates underlying risks. Perhaps now is the time for New World to sell, as stable cash flow is the greatest strength in commercial transactions, and this move could contribute to the group’s sustainable operations.Now, let’s talk about the buyer in this transaction—China Resources Land. Originally named China Resources Property, the company was rebranded in August 2023. It is one of the 26 business units under China Resources Group. Initially focusing on office building management, China Resources Land is now seeking to develop new growth strategies through “both incremental and stock growth” and “light and heavy asset investment,” with asset managementbeing a key area for expansion.Some analysts believe that China Resources Land’s acquisition interest not only reflects its growing attention to the Hong Kong commercial real estate market but also signals its further expansion within the region.

Besides K11 Art Mall, it is rumored that China Resources Land is also negotiating the purchase of non-core properties from Swire Properties, including a set of retail spaces located to the east of Tai Koo Shing Centre, covering approximately 100,000 square feet.As the commercial arm of China Resources, China Resources Land held a mid-year earnings presentation on August 28. According to the financial report, as of June 30, 2024, the company achieved revenue of RMB 79.13 billion, an 8.4% year-on-year increase, with core net profit of RMB 10.74 billion. In terms of its real estate business, the shopping mall rental income reached RMB 9.48 billion, a 9.7% increase year-on-year. The 82 operational shopping centers under the company achieved retail sales of RMB 91.62 billion, up 21.9% year-on-year, with 69 shopping centers ranking in the top three in their respective local markets. Six new shopping centers opened on schedule, with a combined opening occupancy rate of 97.8%.It is noteworthy that in the first half of 2024, China Resources Land was actively strengthening capital operations and optimizing its “big asset management” business. Its commercial REIT successfully listed on the Shenzhen Stock Exchange on March 14, 2024, with an operating net income of RMB 196 million, achieving 107.4% of its budget. Looking back at China Resources Land’s frequent asset acquisitions, it’s clear that the company is steadily moving forward in line with its strategic transformation.