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In the wake of Sunlight Real Estate Investment Trust‘s (SEHK: 435) recent 20% share price decline, the owner of 16 properties in Hong Kong looks worthy of serious consideration.
Although the impact from the prolonged protests in Hong Kong is still a concern, I think the sell-down looks to be massively overdone. Here’s why.
Benefitting from decentralisation
Hong Kong is experiencing an office decentralisation, whereby multinational firms are seeking offices in the city fringe in a bid for more affordable rents. Sunlight REIT is well-placed to capitalise on this trend as it has a meaningful presence in business areas that are benefitting from this shift.
In the first six months of the year, the REIT’s office portfolio performed well, with a positive 11.4% rental reversion rate, demonstrating the resilience of its office portfolio.
Proactive management of retail properties
The prospects for its retail portfolio are less certain. For instance, one of its retail properties, Sheng Shui Centre Shopping Arcade, has been hit hard as Mainland Chinese shoppers make up one-third of its footfall. Tenants selling merchandise such as cosmetics and jewellery are already feeling the pinch.
However, the negative impact may not be as bad as it looks. F&B and banking tenants – which account for 41% of the property’s rent – are less affected. Management said that even if tenant sales in these sectors decline up to 30%, the occupancy cost ratio would still be a manageable high teens to low twenties.
Sunlight REIT is also actively looking to swap out some fashion tenants with F&B or confectionary retailers over time to reduce the impact of e-commerce. Additionally, its suburban malls are less affected as they are less reliant on tourism and mainland shoppers.
Although the risk of negative rent reversion in its retail portfolio remains a possibility, the proactive steps taken by management, and the fact that a significant part of its retail portfolio is in suburban areas, will likely result in a limited short-term impact on rental income.
Flexibility to pounce on investment opportunities
The silver lining of the protests is that it may create great investment opportunities. As investor sentiment declines, asset yields for commercial properties may end up rising, providing a better long-term return.
Sunlight REIT, with its strong financial position, is well-placed to take advantage. It has a gearing ratio of just 20.4%, well below the 45% regulatory ceiling and has access to relatively cheap debt. Its weighted average interest rate as of 30 June this year was just 2.25%, which compares favourably against the capitalisation rate for most commercial properties in Hong Kong – which usually stand above 3%.
Foolish bottom line
Sunlight REIT has been one of the top-performing REITs in the market. Since listing in 2006 till June 2019, the Hong Kong property owner has provided investors with a 477.1% return. That translates to a very decent 15% annualised rate over the last 14 years.
With its stock now 20% below its peak, Sunlight REIT currently offers investors a fat trailing 5.4% yield. And given its strong financial position, resilient portfolio and its longstanding track record of growth, I think now may be a good time to add or start a new position in one of the most consistent REITs in the Hong Kong market.
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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 Jeremy Chia doesn't own shares in any companies mentioned.