Hang Lung Properties initiated its bold HK$2 billion, seven-year asset enhancement plan in 2012, just as the retail market entered a lengthy correction at home, and in the mainland, luxury retailers were hit hard by an anti-corruption crackdown by Chinese leaders. High levels of store vacancies and closures became commonplace, with some top brands postponing their expansions, or scaling back their existing operations. Norman Chan, who joined Hang Lung in 2013 as sales and leasing director, oversees the group’s 31.2 million square feet of investment properties such as shopping malls, offices, serviced apartments and car parks in Hong Kong, and in the mainland. The company has projects in eight mainland cities: Shanghai, Shenyang, Jinan, Wuxi, Tianjin, Dalian, Kunming and Wuhan. Its assets enhancement programme is expected to be completed by 2019 – a combination of renovation of sites by Hang Lung, and redecoration and revamps by its retail tenants themselves. The company’s operating profit from leasing properties was flat at HK$5.71 billion last year. But thanks to strong property sales, its underlying profit excluding revaluation losses in investment properties rose 45 per cent to HK$6.34 billion last year. Can you give us an update on the progress of the asset enhancement programme? It started with the Grand Plaza in Mong Kok in Hong Kong, and was followed by Kornhill Plaza in Quarry Bay, which was completed last year. Work at Fashion Walk in Causeway Bay will be completed in the first half this year. Now, it’s the turn of Peak Galleria on The Peak – that’s a two-and-a-half year plan to be implemented in phases. During all those renovations, the malls stay open as work is carried out at night, or only part of the site is shut-off. In Shanghai, work at Plaza 66 is nearly complete and the next project on the mainland will be Grand Gateway 66. This is not just a physical improvement by us, but also a collaboration with out tenants to achieve an overall enhancement of these properties. For instance, about 300 tenants at Grand Gateway 66 will be participating by redecorating and revamping their own outlets. How closely does the group work with its tenants in this programme? At Japanese retailer Aeon, for example – which has been a partner for around 30 years at Kornhill Plaza – we flew to its headquarters in Chiba-shi in Japan to talk about our renovation plans. The company immediately agreed to join the programme by revamping its 200,000 sq ft outlet into Aeon-Style “concept” store – its first outside Japan. It has already generated higher sales as a result, after it opened in July last year. Another anchor tenant is cinema chain MCL, which has rented in Kornill Plaza since 2002. It is reinventing itself as a modern cinema, and reopened in early April. It introduced a children’s area, for instance, something very unusual in Hong Kong. Why are tenants so willing to use their own capital to decorate their shops? Tenants need to keep their stores updated as markets evolve. They will not necessary enjoy a rent concession, but they are likely to generate higher sales after any revamp. They all conducted comprehensive sales projections from being part of our asset enhancement programme. We, of course, have our own projections, and are aiming to achieve annual returns of 30 per cent within three years of the renovation work being completed. Is it unusual for tenants to be willing to decorate their shops, using their own money? During such a large-scale plan, we do not want to keep our tenants in the dark. New lease arrangements will be carried out during the process, and so for everyone it is a huge investment. How long are tenants likely stay if they renew their lease agreement following renovation? That will vary with different retailers. Standard-sized shops with good brands, normally stay at least three years. But those tenants pouring in significant investment will receive longer lease terms, maybe up to six to eight years, for large flagship stores. Will any tenants need to quit the shopping malls concerned? A small number will be affected, generally those whose sales are underperforming. There will be no hard feelings as we hope they can move to locations where business can be improved, and that might be to other malls we own. Are any luxury brands resisting to commit to additional investment in China, affected by the Beijing government’s crackdown on corruption? Quite the opposite – most stores at our luxury shopping mall Plaza 66 in Shanghai, for instance, are happy to redecorate, as the renovation plan there approaches its final stages. What’s your general view of the mainland’s retail market outlook? Some are closing shop, but not pulling out of the market completely. Some are having to “rationalise” their over-expansion plans by shutting stores in secondary locations. But a common theme is finding the right location for expansion. Retailers are focusing their “bullets“ – capital expenditure – on areas where they can generate the highest sales. Fortunately for us, our Plaza 66 has become a focal point for many. Sales of luxury brands there have reported an overall increase in sales after the revamp, and so they are clearly benefiting from the asset enhancement programme. What other conditions are helping the luxury mainland retail market improve? Devaluation of the yuan, for sure, has made shopping at home cheaper. Global brands have adjusted their pricing strategies to narrow the price gap between overseas and China. So mainland shoppers needn’t go to Hong Kong or Europe and the US to shop for designer-label bags, shoes and accessories. Narrowing the price differentiation will discourage mainland shoppers from having to make shopping trips to Milan, New York or Paris. The Beijing government has also tightened its customs checks on bulk purchasers buying luxury goods overseas and reselling them for profit in China. In addition, the recent terrorist attacks in Europe have dampened mainlanders travelling overseas. Who are the buyers of luxury brands? The gift market is declining. Buyers are getting younger and more sophisticated, as they recognise the brands. Their taste is sharper, and they are not just buying the label. Besides setting aside HK$2bn for your asset enhancement programme, what other plans have you got for the company? We are also investing in software. We have committed 16 million yuan to develop our CRM (customer relationship management) systems, first in Plaza 66 and gradually in other malls in China and Hong Kong. We also plan to team up with our tenants to breed a new generation of luxury shoppers.