PROPERTY

Swire Properties Limited, which is a wholly-owned subsidiary, owns the principal property interests of the Swire Pacific Group which are held either for long-term investment or for development and sale. Swire Properties' portfolio is located in Hong Kong but the company is also a joint venture partner in an investment project in Shanghai. The Group also owns properties in Florida, USA. Swire Properties' completed investment portfolio in Hong Kong comprises prime office, retail, industrial and residential properties with a gross floor area totalling 9.8 million square feet, with a further 2.6 million square feet under or pending development, including a 1.2 million square foot commercial centre shortly to be completed adjacent to Kowloon Tong station. Swire Properties is developing, through subsidiary or associated companies, over 8,800 residential apartments for sale in Hong Kong, as well as commercial and industrial space totalling 1.6 million square feet through associates, either for sale or for investment. Swire Properties also has equity interests in the three hotels in Pacific Place and in a hotel under development in Tung Chung new town.

The property division's contribution to Group attributable profit in 1997 amounted to HK$5,155 million, as compared with a contribution of HK$4,571 million in 1996. Excluding the exceptional profit of HK$1,050 million from the sale of 80% of the JW Marriott Hotel in 1996, the property division's contribution was 46.4% higher in 1997, mainly due to higher profits from the sale of residential apartments and office space in Hong Kong.

HONG KONG

Completed investment properties

Net rental income from the Hong Kong property portfolio increased to HK$3,785 million in 1997, as compared with HK$3,551 million in 1996, an increase of 6.6%. The completed portfolio continued to enjoy substantially full occupancy throughout 1997, whilst overall rental levels generally held steady. The Island Place shopping centre, in which Swire Properties has a 60% interest, opened in March 1997 and was virtually fully occupied for most of the year. The Cityplaza One office tower received its occupation permit in August 1997 but made only a small contribution to the 1997 results, although its contribution in 1998 will be substantially greater.

Office rental levels achieved on new lettings in Pacific Place during 1997 were higher than expected, notwithstanding the prospect of additional supply in Central District in the next few years. In Island East, the supply of new office space constrained growth in market rentals and slowed the take-up of space in the Cityplaza One office tower. By year-end, Cityplaza One was 52% let but the position has since improved to 62%. Notwithstanding a slower market during 1997, Swire Properties' portfolio in Cityplaza and TaiKoo Place continues to establish its reputation for high quality office space at much lower rents than available in Central District. The surrounding environment and its amenities are being continuously upgraded and are becoming a recognised attraction for office users. The Devon House office tower achieved higher overall rental income in 1997, mainly because of mid-term increases agreed during the course of 1996. The other completed office towers and the three light industrial buildings in the Island East portfolio maintained steady rental income in 1997. Overall rental levels in Swire Properties' office portfolio are expected to remain reasonably firm in 1998. Nevertheless, there are concerns over the prospect of additional supply and the possibility of further contraction in the financial services industry following the downturn in regional markets.

The retail sales market in Hong Kong has been adversely affected by the downturn in Hong Kong tourist arrivals and the uncertainties created by financial turmoil in the Asian region. Although The Mall at Pacific Place and the Cityplaza shopping centre did not entirely escape this general malaise, overall turnover figures for both centres in 1997 held steady at around 1996 levels. However, many retailers reported reduced sales in the latter months of 1997 and so far in 1998 there are no signs of recovery. The Mall was virtually fully let throughout 1997 and rental income overall showed some improvement over 1996. Several anchor tenancies were renegotiated during the year at higher rents. There is no shortage of prospective tenants keen to take up available space in The Mall, which is firmly established as the primary shopping destination in Central District. The Mall presently comprises over 150 retail and catering outlets, as well as four anchor tenancies: the Hong Kong Seibu, Lane Crawford and Marks & Spencer department stores and United Artists' cinemas. The retail space in the Cityplaza shopping centre beneath the Cityplaza One office tower was reinstated in January 1997 and the contribution from this space substantially offset some reductions in other areas occasioned by continuing work on a comprehensive upgrading of Cityplaza's appearance and facilities. Cityplaza's rental income was marginally lower than in 1996 but the upgrading work, which is expected to be completed by 1999 will further reinforce Cityplaza's pre-eminence as the major shopping centre in Island East. Cityplaza comprises three major department stores operated by Uny, Wing On and Marks & Spencer, as well as over 180 retail and catering outlets. The Cityplaza Ice Palace remains a popular attraction and a four-screen "Cineplex" expected to be completed in 1999 will add to the entertainment amenities.

General building plans approval has been received for the redevelopment of the 211,000 square foot Mount Parker House office building next year to make way for a 33-storey 650,000 square foot office tower to be known as Cityplaza Two. However, the timing of this redevelopment scheme has not been finally decided and will depend on market conditions.

Swire Properties also owns over 300,000 square feet of neighbourhood shopping space and nearly 4,000 carpark spaces at Taikoo Shing which reported satisfactory earnings growth during 1997. By year-end, work on a plaza on the open space next to Cityplaza to be known as "Piazza Verde" was substantially completed. This work is part of a longer-term programme to upgrade the roads and landscaped areas within the Taikoo Shing estate and to create an integrated business district combined with TaiKoo Place.

Overall rental income from the residential portfolio held steady during 1997. Occupancy levels were high throughout most of the year, although there was some softening of demand for The Atrium and Parkside serviced apartments at Pacific Place towards the end of the year, following the earlier downturn in Hong Kong hotel occupancies. Apart from the serviced apartments at Pacific Place, Swire Properties owns The Albany residential apartments in Mid-Levels and other luxury properties on Hong Kong Island, two of which were demolished during 1997 to make way for town-house development schemes.

Looking forward, Swire Properties' portfolio is likely to show modest growth in 1998 but stronger growth in 1999 and beyond, once the current development programme comes on stream, in particular, completion of Festival Walk in the latter half of 1998, and the Lincoln and Oxford House office towers in 1998 and 1999 respectively. However, current difficulties in regional financial markets, if prolonged, are bound to have further repercussions for the Hong Kong economy and, consequently, demand for space in Swire Properties' portfolio. In spite of recent upheavals, Swire Properties' rental performance has held up well and vindicates the company's long-term strategy to concentrate on quality properties in prime locations.

Investment properties under development

It is expected that Festival Walk will receive its occupation permit during the first half of 1998. Allowing a period for tenants' fitting out, it is probable that a soft opening for retail trading can be achieved by October 1998. Festival Walk, which is owned 50:50 by Swire Properties and CITIC Pacific, is located adjacent to the Kowloon Tong MTRC/KCRC interchange station and comprises 981,000 square feet of retail space in 6 levels, 232,000 square feet of office space and 830 carpark spaces as well as a public transportation terminus linked to the station. To date, 79% of the retail space has been committed and it is hoped that the remainder can be let by the opening date despite the softer retail market. The retail configuration comprises over 250 individual outlets, including a 2,000 seat, 11-screen cinema to be operated by AMC, major retail names including Marks & Spencer and Park'N Shop, as well as a wide range of restaurant outlets. There will also be an ice rink and exhibition areas. As this development is in a new location, the office space is not expected to be let until after the shopping centre is opened.

During 1997, Swire Properties completed its assembly of a development site fronting on 1-13 Queen's Road East, Wanchai and extending back as far as its residential scheme located at 9 Star Street, already under construction. It is intended to build two office towers with a gross floor area totalling 500,000 square feet, for completion in 2001.

The occupation permit for the Lincoln House office tower in TaiKoo Place is expected to be received shortly. Lincoln House comprises 340,000 square feet of office space in 24 storeys and 164 carpark spaces. It has unrestricted views across Hong Kong harbour and direct access through the TaiKoo Place walkway system to the Quarry Bay MTRC station. The space is now being offered to tenants. The neighbouring Oxford House office tower, comprising 510,000 square feet in 41 storeys plus 198 carpark spaces, is expected to receive its occupation permit in early 1999. On completion of these two office towers in TaiKoo Place, Swire Properties will have a portfolio of nearly 4.2 million square feet of office space in Island East, as well as 1.8 million square feet of light industrial/office space.

The property at 3 Coombe Road, The Peak has been demolished to make way for four houses with a gross floor area of 14,500 square feet, due for completion in 1999. Two houses on adjoining sites at 29-31 Tung Tau Wan Road, Stanley were also demolished in 1997 to make way for a scheme comprising two semi-detached houses on each of the sites, due for completion in 1998.

The portfolio of investment properties in Hong Kong and the USA, both complete and under development, was valued as at 31st December 1997 by Jones Lang Wootton and, as a result, Swire Pacific's property valuation reserve has decreased by HK$11,351 million. Particulars of the portfolio in Hong Kong and the USA are set out on pages 84 to 92. As at 31st December 1997, the Hong Kong portfolio was valued at HK$81,688 million as compared with a valuation of HK$89,656 million as at the end of 1996.

Following Swire Properties' in-house valuation as at 31st December 1996, property values in Hong Kong appreciated further in succeeding months but have since declined quite sharply from their peak. Although open market rentals in the Hong Kong portfolio have generally held steady, capital values have been adversely affected by the increase in Hong Kong interest rates as a result of the defence of the Hong Kong dollar's linked exchange rate, following the devaluation of Asian regional currencies in the second half of 1997.

Property trading

The Hong Kong residential market continued to strengthen during the first half of 1997, as a follow-on to the sharp recovery in prices during 1996, but sentiment was severely affected in the second half of the year by the turbulence in Asian financial markets and higher interest rates in Hong Kong. The market is now trading under more settled conditions, but at lower price levels, whilst transaction volumes remain relatively modest. Overall supply, at least in the medium term, will continue to fall short of demand but there is now a firm determination on Government's part to redress this imbalance through accelerated land sale programmes in the coming years.

Swire Properties' profits from the sale of residential units in Hong Kong were appreciably higher in 1997 as compared to 1996, mainly because of the sale of 126 units in The Floridian residential scheme on Sai Wan Terrace, Quarry Bay which was completed in May 1997. The contribution from the sale of residential units in Island Place, North Point was also higher in 1997. A further 310 Island Place residential units were sold in 1997 at higher average prices than the 376 units sold in 1996. The Floridian development has been undertaken by a wholly-owned subsidiary, whereas Island Place is owned by a joint venture company held 60:40 by Swire Properties and China Motor Bus Company, Limited (CMB). The 1997 results also include completion profits from the sale to "strata-title" purchasers of 21 floors in Island Place Tower, the office tower portion of the development. Following the market downturn in the autumn of 1997, sales activity slowed appreciably. By year-end, 88 Floridian units remained unsold as well as 98 Island Place residential units and four office floors in Island Place. Since the year-end, a further 40 Floridian units have been sold. Although prices are lower than the average achieved in 1997, the recent sales launches have been well received and suggest that market conditions may now be stabilising.

The main building contract for the 9 Star Street residential scheme in Wanchai was awarded before the end of 1997 and is expected to be completed by mid-1999. The scheme comprises two towers providing 319,000 square feet of space in 329 apartments, plus 83 carpark spaces and 13,000 square feet of retail space. Terms for the modification of the lease on Taikoo Valley Site V, King's Road have still to be agreed with Government. As a consequence of the delay in resolving the premium issue, the residential scheme planned for this site is now likely to be completed in the year 2000. A twin tower scheme is planned, comprising 395,000 square feet of residential accommodation in 432 units, 144 carpark spaces, a new school and a community centre.

The 625 King's Road office tower developed by a joint venture company owned 50:50 by Swire Properties and CMB will shortly receive its occupation permit. The scheme comprises nearly 300,000 square feet of office space in 26 storeys above two basement carpark levels providing 84 spaces, plus a small retail content. In view of current market conditions, the marketing strategy for this building is presently under review.

Swire Properties has a 20% interest in the consortium undertaking the development of the first phase of MTRC's Tung Chung station development on Lantau Island. The main building contract for Site 1, comprising 1.8 million square feet of residential accommodation in 2,158 units, is making steady progress under a phased construction programme. Phase 1 comprising 680 units is expected to be complete in the second half of 1998 and Phases 2 and 3 early in 1999. Marketing of Phase 1 units is expected during 1998. Site 2 of the Tung Chung scheme will comprise a 463,000 square foot shopping centre, a 160,000 square foot office tower and a 415 room hotel. Site 2 is expected to be completed in the second half of 1999 and the consortium intends to retain all three components of Site 2 for investment. The foundation contract for Site 3, comprising over 1.0 million square feet of residential accommodation in 1,240 units will start shortly and main building contract work is scheduled to start shortly for completion in 1999. The Town Planning Board has recently approved an application by MTRC to increase the plot ratio for Site 3, which would increase the residential floor area by 505,000 square feet. The consortium has expressed interest in proceeding with a larger scheme but the commercial terms have still to be agreed with MTRC.

In April 1997, a joint venture company owned 50:50 by Swire Properties and Sun Hung Kai Properties Limited acquired a 98% interest in a company owning the Shiu Wing steel mill site at Tseung Kwan O. The site has a development potential of over four million square feet of residential accommodation and it is intended to construct 4,674 residential units, plus 32,000 square feet of neighbourhood shopping space and 965 carpark spaces in a three phase development programme for completion in 2000, 2001 and 2002. The site is in an attractive location with panoramic sea views and direct access to a future MTRC station on the recently announced extension line to Tseung Kwan O new town.

A 30,000 square foot residential tower on Sai Yee Street, Mongkok in which Swire Properties has an 80% interest has recently been completed and will be offered for sale shortly along with its 4,000 square foot retail podium and 11 carpark spaces.

No decision will be taken on a start date for the redevelopment of the former CMB bus depot site on Wong Chuk Hang Road, Aberdeen, which is owned 50:50 by Swire Properties and CMB until the prospects for the industrial market improve. The site has a development potential of 382,000 square feet and is presently being let to a carpark operator.

Swire Properties also holds equity interests of 8% and 7% respectively, in a 1.1 million square foot residential development in Fanling and a 317,000 square foot residential development in Yuen Long, both of which will be completed in mid-1998. Units will be offered for sale in 1998.

Hotels

Following completion of the sale of an 80% interest in the JW Marriott Hotel to a consortium of investors in 1996, Swire Properties retains a 20% interest along with a similar interest in each of the other hotels at Pacific Place, the Conrad International and Island Shangri-La. In spite of a fall in occupancy levels in the second half of 1997, room rates at the three Pacific Place hotels held up relatively well throughout the year. However, competition will remain keen until there is a recovery in the overall level of visitor arrivals to Hong Kong.

SHANGHAI

Construction of the 1.1 million square foot retail/office development on Nanjing Road West is now well advanced and is expected to be completed before the end of 1998. Swire Properties has a 10% share in this development, whose majority shareholder is China International Trust and Investment Corporation Hong Kong (Holdings) Limited. The scheme comprises a 720,000 square foot office tower above a 320,000 square foot retail podium with provision for 370 carpark spaces and is well located in a prime shopping district in Shanghai. The substantial over-supply of office space in Shanghai is a concern for the immediate future but the shopping centre is likely to lease well.

USA

1997 was an active year for the Group's development on Brickell Key, Miami. In January 1997, the acquisition of the last remaining 5.28 acre development site on the southern tip of the island was completed. In December 1997, an agreement was signed with Mandarin Oriental International Limited to develop a 337,000 square foot, 325 room luxury hotel on part of this new site, which will be owned by the Group and Mandarin in the proportion 75:25, respectively. The hotel will be known as the Mandarin Oriental, Miami and is expected to open before the end of 2001.

In July 1997, the 272 unit Courvoisier Courts rental apartment tower on Brickell Key was sold to an institutional investor. All except one of the 288 units in the One Tequesta Point condominium tower were sold by the end of 1997. The neighbouring Two Tequesta Point condominium tower, which is expected to be completed before the end of 1998 and a total of 125 sales contracts have been signed to date.

The office leasing market in Miami has much improved, which enabled Courvoisier Centres I and II to achieve occupancy levels of 97% and 90% respectively by year-end, appreciably higher than levels achieved in previous years.

* Before net finance charges.

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