Leading Asian REIT - Link REIT

The financial landscape in Hong Kong is witnessing interesting movements as one of the leading real estate investment trusts (REITs), Link Real Estate Investment Trust (00823.HK), recently released its semi-annual financial report for the period ending September 30. This announcement, made on November 6, has attracted considerable attention from investors and the capital markets, given Link's prominent position in the Asian REIT landscape. With a diversified portfolio that includes retail spaces, car parks, office buildings, and logistics properties, Link's assets are spread across Hong Kong, mainland China, Australia, Singapore, and the United Kingdom.

Link's performance remained robust, demonstrating resilience amidst the fluctuations of the market, enhancing the confidence of long-term investors who look for stability and potential appreciation of assets. The REIT’s strategy appears to be paying off, suggesting that it is well-positioned to recover from the impacts of recent economic disruptions.

At the end of the third quarter, Link’s property portfolio was valued at HKD 237 billion, with properties concentrated primarily in Hong Kong, which comprises 130 of its total holdings. The valuation of its Hong Kong properties accounts for approximately 74.1% of the total assets, followed by a smaller percentage from mainland China and international markets. The primary focus of Link's investments in the Hong Kong region is on community shopping centers, which cater to essential consumer needs, alongside several car parks associated with public housing areas and a limited number of office properties.

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During the first half of the 2024/2025 financial year, Link reported total revenue of HKD 7.153 billion, marking a year-on-year increase of 6.4%. The net property income was HKD 5.359 billion, reflecting a growth of 5.8%. This consistent financial performance can largely be attributed to the stable and resilient base of community retail operations in Hong Kong, which continues to support solid growth.

When delving into specifics, total revenues from Hong Kong properties experienced a modest gain of 2.2%. The retail occupancy rate remained high at 97.8%, while the renewal rental adjustment was recorded at 0.7%. Even amid a broader weak retail scene in Hong Kong, Link’s portfolio continues to hold steady. Meanwhile, properties in mainland China benefitted significantly, with total revenue and net property income increasing by 39.2% and 37.6%, respectively, largely due to the acquisition of the remaining 50% stake in Shanghai Qibao Link Plaza earlier this year. Retail assets in both Singapore and Australia are nearly fully leased, underscoring Link's competence in operations and asset management.

Link has always upheld a conservative approach to capital management, which has been evident in its stable financial health. The REIT’s total debt has been further reduced to HKD 55.6 billion, with a healthy net debt to equity ratio of 20.6%. The average borrowing cost remains competitive at 3.69%. The company also ensures that its non-Hong Kong asset income is fully hedged against foreign currency exposure, which aids in mitigating the impact of foreign exchange fluctuations on its distributable earnings.

Recognized for its sound financial fundamentals, Link has received investment-grade ratings from major credit agencies, including Moody's, S&P, and Fitch, with ratings of A2, A, and A respectively, all with a “stable” outlook. This favorable credit rating not only enhances the REIT's negotiation power in the credit markets but also reflects its competitive strength.

When it comes to dividends, Link has consistently maintained a stable distribution policy, committing 100% of its distributable income towards dividends—this exceeds the minimum statutory requirement of 90% for REITs in Hong Kong. Since its listing in 2005, Link has seen its total distributable income grow annually, with a remarkable 112% cumulative growth accumulated over 12 years from the 2011/2012 to the 2022/2023 financial years, translating to a compound annual growth rate (CAGR) of 7.1%. This growth rate is significantly higher than that of its peers, which include real estate developers, REITs, and retail operators across Hong Kong, Singapore, and Australia.

Furthermore, Link boasts excellent liquidity with 100% public float, devoid of a single dominant shareholder. As a constituent of the Hong Kong flagship Hang Seng Index, Link also forms a part of the underlying assets for various mutual funds and exchange-traded funds (ETFs). The REIT's appeal lies not only in its substantial and sustainable long-term returns but also in its robust dividend policies and ample liquidity, attracting both international institutional investors and local Hong Kong stakeholders.

Investing in REITs, especially in Link, represents a methodology where investors entrust funds to professional managers and asset management teams. These teams execute a spectrum of real estate-related investments and operations before channeling the returns back to all fund holders. Thus, these earnings primarily come from stable rental incomes generated by the real estate assets and their appreciation in value.

Over the years, Link has successfully provided solid returns to its shareholders, attributable to its strong underlying asset optimization and meticulous management, along with proactive expansion during favorable market conditions, which have fostered long-term value growth.

Link persists in its evaluation of its existing asset portfolio, actively seeking enhancement opportunities for assets with potential for appreciation through proactive renovations and efficiency management that lowers operating costs. One such example is the successful asset upgrade project at Link City in Shenzhen, completed in July this year. This project yielded a record increase in foot traffic and tenant sales, generating substantial returns on the investment made. The renovation cost approximately RMB 24 million, resulting in an impressive investment return rate of 43.8%. By attracting local consumers and those from nearby Hong Kong, Link City has solidified its strategic market positioning, which reinforces Link's ability to respond effectively to changing market dynamics.

Besides optimizing its current portfolio, Link remains vigilant in the external market to seize quality investment opportunities that arise, particularly in acquiring distressed assets from developers facing liquidity pressures. In 2015, Link initiated its entry into the mainland Chinese market, paving the way for further expansion opportunities.

In March 2023, Link announced the completion of a SGD 2.2 billion acquisition of two retail assets in Singapore, signifying its official advance into the Singaporean market. These assets, Jurong Point and Swing By @ Thomson Plaza, reported an occupancy rate of 99.8% and a renewal rental adjustment rate of 18.9% for the first half of the 2024/2025 financial year. The malls benefit from stable demand bolstered by nearby residential communities, with foot traffic now restored to pre-pandemic levels. Moreover, as a third-party asset manager, Link has also engaged with local government to manage another suburban mall in Singapore, AMK Hub, thereby generating management fee income—a strategic move that further supports Link’s expansion and operational success in non-organic growth.

Amidst market fluctuations, several property developers in mainland China and overseas are compelled to divest quality properties to alleviate their own liquidity issues, leading to common occurrences of asset valuation discounts. Link, attuned to market dynamics, is actively pursuing strategic investment opportunities that may arise due to such valuations. However, the firm is not rushing into hastily made decisions but is instead adopting a deliberate and patient approach to assess each asset's particulars and secure high-potential investments.

The diversification of Link's portfolio not only introduces new rental revenues but also transitions Link from a single-market retail manager at its inception to a multifaceted asset management company. The spectrum of asset types has broadened from community retail, wet markets, and parking facilities to include office and logistics properties. Investment markets have expanded from Hong Kong to various regions in mainland China and beyond, as Link embraces new investment structures that include minority stakes and third-party property management services. This diversified approach mitigates risks and enables Link to sustain robust, enduring growth even in challenging economic conditions.

Moreover, asset disposition forms a critical component of Link’s overall asset management strategy. The company continually enhances asset values, keeping communication open with the market to identify and assess assets nearing the end of their lifecycle, which can either be wholly sold or jointly divested while retaining management control. This strategic approach allows Link to usher these assets into fresh developmental phases while recycling capital for future property investments.

Link is presently confronted with a notable undervaluation in the market, given its price-to-book ratio (P/B) stands at a mere 0.49, below 95% of the past decade and significantly lower than the 10-year median valuation of 0.89.

Looking forward, Link's depressed valuation is poised for potential recovery, driven by several key factors. Firstly, the directional shift in U.S. Federal Reserve monetary policy could significantly impact Link. On November 7th, the Fed lowered interest rates by another 25 basis points, bringing the total reduction to 75 basis points.

Given Hong Kong's linked exchange rate system, the Hong Kong dollar is set to follow the U.S. dollar into this easing environment. Consequently, Link's financing costs in the Hong Kong market are expected to trend downward, which should enhance profitability and support the REIT's fundamental stability as it awaits fresh opportunities for non-organic growth. As interest rates continue to decline, capitalization rates are likely to follow suit, fostering an improvement in property asset valuations and subsequently bolstering Link's capital value.

Moreover, with the Fed's monetary easing, Chinese monetary and fiscal policies are also anticipated to gain momentum. Since September 24, various departments in China have successively rolled out a package of policies aimed at reviving the macroeconomy, reversing pessimistic expectations in the capital markets. This has sparked a notable rebound in the Hong Kong stock market, increasing the valuation prospects for blue-chip stocks, including Link.

Link’s properties in Hong Kong are predominantly community-centered shopping malls that include dining, supermarkets, and wet markets closely tied to residents' daily lives. This positioning renders Link more resilient compared to the broader retail market in Hong Kong, particularly sectors reliant on tourist traffic, such as luxury retail. The stability and frequency of everyday consumer needs significantly contribute to high occupancy rates in Link's retail spaces. Furthermore, assets in mainland China are situated in prime locations within first-tier cities, leading to a swift recovery post-pandemic, while Link's properties in Singapore, Australia, and the UK are also strategically placed in accessible and high-traffic areas, ensuring steady demand.

Another potential catalyst for value recovery is the anticipated implementation of REITs connectivity policies between mainland China and Hong Kong, wherein Link, as the largest REIT by market capitalization in Hong Kong, is likely to be incorporated into the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect schemes. This inclusion will enhance liquidity and value discovery for Link, propelling its valuation upward.

Given the firm’s stable fundamentals, better-than-expected market performance, and factors such as REITs connectivity, undervaluation, and consistent dividend growth, investment banks both domestically and internationally have begun to warm up to Link. Following its performance report in early November 2024, major financial institutions like JPMorgan and Goldman Sachs raised their target prices for Link to HKD 45 and HKD 49, respectively, adjusting their ratings to “overweight” and “buy.” In contrast, CMB International set a target price of HKD 47.7 while maintaining a “buy” rating.

Addressing potential uncertainties ahead, Link has clearly articulated that its previously successful model must evolve to secure greater achievements moving forward. More than merely a conventional REIT, Link identifies itself as a “REIT+,” aiming to perpetuate diversification strategies and enhance its established integrated operating model. This approach is intended to mitigate the impacts of external macroeconomic fluctuations while ensuring continued stable returns and achieving long-term growth across various economic cycles.

The “REIT+” designation is set to serve as Link's long-term developmental goal, complementing its previously proposed “Link 3.0” strategy. As part of implementing this strategy, Link will focus on two growth drivers: enhancing the quality and resilience of property income through dynamic investment portfolio management and diversification strategies for better returns for unit holders, and expanding the investment management business through collaborations with capital partners to accelerate diversification and generate income through management services. This strategy reflects the management team's commitment to innovation and proactive solution formulation to achieve resilient and diversified income streams while exploring new growth avenues.