Further to the announcement of the project release on 28 May, Hang Lung Properties （00101 HK, "HLP"） held aconference call on 29 May with investors to dispatch more information on the project. HLP clarified that the GFA ofthe project released on 28 May, which was 194,100.91 sq.m., did not include the GFA of the potential construction ofbasement areas. After adding back basement areas, the total GFA of the project came to over 200,000 sq.m.,rendering lower land cost per GFA than the previously expected figure of about RMB55,285/sq.m.
HLP expects the initial rental yield of the project to lie between 4% and 5%. The management further disclosed thatroughly 45% of the project GFA will be assigned for retail space, and the rest will be designated to office space. HLPrevealed that the average daily rent amount of comparable grade A office spaces in Hangzhou is aboutRMB10/sq.m., while comparable daily retail rent amount is about RMB30/sq.m. In terms of positioning for this project,HLP aims to build a high-end shopping mall with grade A office spaces, which is not surprising as the Company'sexisting projects in other cities follows the same positioning. HLP believes that Hangzhou Tower is the closestcomparable project to the future shopping mall in the city.
HLP expects major capex for the project to occur in 2022-2024, not including land cost payable to the Hangzhougovernment. As disclosed on 28 May, the total development cost of the project is expected to be about RMB19 billion,including land cost of RMB10.73 billion. The land cost will be paid in 3 installments with about RMB5.4 billion due in2018 and another RMB5.4 billion due in 2019. HLP expects to receive the plot of land from the Hangzhou governmentin 2019; the project is expected to be completed in 2024. In other words, HLP's capex guidance （HKD4-5 billion）remains more or less unchanged for 2018 and 2019.
HLP's updates are basically in line with our expectations, published in our morning note on 29 May, in which weexpect a 40-60 split of GFA between retail space and office space; we have derived a project gross rental yield of4.6% given our relatively conservative daily rental assumptions of RMB5.0/sq.m. and RMB27.1/sq.m. for office andretail, respectively. We would like to reiterate our view that the land acquisition is fairly priced, but it is definitely not abargain. Also, we believe that the land cost payment will raise HLP's net gearing, and hence result in higher interestpayment for its debt. HLP pledged that its dividend payout capability would not be affected by the acquisition aloneand the management was quite optimistic towards rental growth in 2019 and 2020 as some investment propertiescurrently under construction will be completed during the two years. However, we are less optimistic towards rentalgrowth in 2019 and 2020, seeing the longer-than-expected ramp-up period of Dalian Olympia 66, which has beenreflected in our rather conservative rental growth assumptions used in our previous report published on 31 January.
As of now, we maintain our "Accumulate" rating for HLP, but may slightly revise our TP in the next report. Our currentTP for the Company is HKD22.22.