Link Real Estate Investment Trust is the first REIT to be listed on the Hong Kong Exchange. Listed in 2005, Link REIT is now (2015) the largest REIT listed on HKEx. Link REIT is also the only REIT that is included in the Hang Sang Index.
TICKER SYMBOL: 0823.HK MARKET CAP: HK$ 97 Billion (Updated 12 Feb 2016) MARKET PRICE / SHARE: HK$ 42.95 (Updated 12 Feb 2016) SECTOR: Real Estate Investment Trust
INDUSTRY: Retail Property
Being a real estate investment trust, the business of Link REIT is quite straight forward. It is the largest owner of retail properties in Hong Kong. Its portfolio spans across Hong Kong, Beijing and Shanghai but the majority of its assets are still based in Hong Kong. In terms of market capitalisation, it is also the largest REIT in Asia.
The REIT focuses in sub-urban retail malls and markets as the main assets class.
The REIT has a strong track record of growing its tangible assets per unit from just HK$9.23 in FY2006 to HK$51.37 in FY2015. The growth of its revenue and earnings were equally impressive. Its revenue grew from HK$3.5 billion in FY2005 to HK$7.7 billion by FY2015. Its operating income started from just HK$1.8 billion in FY2005 and was boosted to HK$5.2 billion by FY2015.
As with most REIT, the most important factor for investors would be its distribution. Link REIT has a strong history regarding its distribution for unitholders. Its distribution per unit more than tripled from just HK$0.65 per unit in FY2006 to HK$1.83 per unit by FY2015.
1. Strength of Current Assets – Largest REIT in Asia
Link REIT started out as properties owners of sub-urban retail properties and market in Hong Kong. Today, the REIT has started investing into other commercial properties such as offices and also ventured out of Hong Kong with its properties in Beijing and Shanghai.
The portfolio of Link REIT are mainly made up of sub-urban retail malls such as:
-Hoi Fu Shopping Centre
-Temple Mall, H.A.N.D.S.
-Butterfly Plaza and more!
However, the REIT does have a huge development project in Kowloon East worth more than HK$10.5 billion (in cost). Link REIT has a 60% stake in the project.
Link REIT has self-imposed guidelines on its portfolio mix. Today, still more than 93% of its portfolio is located in Hong Kong with 72% of total assets still in the Hong Kong retail sector.
From its presentation, it seems that the REIT would not allocate more than 12.5% of its asset in China or in office properties. Moreover, the company would keep its property development projects below 10% of its asset value.
2. Proven Track Record
Link REIT is managed with a very structural and systematic cycle. Over its history, it has completed 39 asset enhancements (AEI) projects by FY2015. The REIT has a general plan to complete 4 to 6 AEI projects in a year. In fact, Link REIT already has 30 AEI projects planned till 2020, which would fuel its future growth. The REIT has an internal target of generating a 15% Return on Investment on these AEI. So far from its track record, the REIT has certainly been able to meet these targets.
3. Possibility for Future Growth
On top of that, the REIT invested in a development project in Kowloon East for a office tower. The REIT owns 60% of the project and is partnering with Nan Fung Development, another well-known developer in Hong Kong. With the office tower expected to be completed by 2020, this would be a strong contributor to the REIT in the future.
Lastly, the REIT’s venture into China is yet another channel for the trust to grow its size and distribution in the future. For example, the REIT has recently acquired the EC Mall in Beijing for about RMB2.5 billion. The mall is in a prime location and has more than 99% occupancy rate. With leases on more than 1/3 space expiring by 2016, any increase in rental rate would benefit the REIT in the very near future.
1. High Concentration in the Retail Sector
However cliché this sounds, no investment is without risks.
As for Link REIT, due to its high concentration in the retail sector, as e-commerce gains popularity, there might be a direct risk to the business of its tenants. Therefore, it might even lead to a decrease in demand for retail malls in the future as most e-commerce business can operate out of a warehouse.
2. Cyclical Nature
Moreover, given the cyclical nature of the property market, buying a REIT at the peak of a property cycle might post some valuation risk for investors too.
3. Growth going forward
Lastly, with Link REIT expanding into China for growth, investors have to be wary and ask themselves questions like:
-Does the REIT manager feel that the prospect in Hong Kong is no longer as attractive as before?
-With the competitive nature of the Chinese market, can Link REIT growth its asset there in a sustainable manner?
THOUGHTS ON VALUATION (NOT A BUY OR SELL CALL!)
As of 13th Feb 2016, Link REIT is trading at just 5.4 times its earnings and offers a distribution yield of 4.6%. Moreover, the REIT is currently at 0.8 times its tangible book value.
Based on its historical multiples, the REIT trades within a range of just 0.8 times its tangible book value to 1.5 times. Thus, the REIT is now at one of its lowest point in term of its price to book value.
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Disclosure: Stanley does not own shares in Link REIT.