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Sunlight REIT (SEHK:435), a wholly-owned subsidiary of property developer Henderson Land Development Co Ltd (SEHK:12), manages 11 office and five retail properties in Hong Kong with a gross rental area (GRA) of nearly 1.2 million square feet and aggregate appraised value of HK$19.5 billion (US$2.5 billion). The portfolio offers investors both visible income as well as great exposure to changing office trends.
Focused on non-discretionary spending
Sunlight’s retail properties are situated in high population density areas such as transportations hubs and residential estates, supporting steady and more predictable foot traffic. Out of the five retail properties, four reported at least 99% occupancy rates at the end of 2018 – a testament to their quality. More interestingly, the retail portfolio focuses on non-discretionary shopping, such as restaurant receipts and pharmacy sales, which are relatively more stable than discretionary spend such as clothing.
Solid financial performance
The company’s retail portfolio reported an 11.1% year-on-year rental reversion during the second half of 2018 compared to the same period the previous year. A recovery in Chinese tourism growth should bode well for future sentiment, with Hong Kong retail numbers contracting for four consecutive months in 2019.
Following weaker Chinese tourism growth from 2016-2018, tourism numbers stabilised in the early part of 2019, with a reported 24 million mainland Chinese tourists in the first five months of the year, up 17.5% year-on-year.
Evolving commercial office landscape
Meanwhile, Sunlight’s office properties are located both in core and decentralised business areas, and is a likely beneficiary as companies look for affordable office options within the business districts throughout Hong Kong. This is particularly true as some tenants are more open to sharing common facilities and work space.
Sunlight’s total office occupancy rate is 95.7%, which includes two properties, Bonham Trade Centre (84.9%) and The Harvest (63.9%) which are both undergoing asset enhancement initiatives (AEIs). Rental reversion for its office space was an impressive 10.1% year-on-year during the second half of 2018.
Foolish final thought
Overall, limited new commercial supply within Hong Kong’s central business district bodes well for property managers with solid assets, while improving infrastructure supports foot traffic into Hong Kong. The balance sheet and debt profile is extremely well-managed. Sunlight REIT offers investors a defensive growth strategy, with a 4% dividend yield and potential for capital appreciation.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Christopher Chu doesn’t own shares in any companies mentioned.