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Link Real Estate Investment Trust (SEHK: 823), or Link REIT, is probably one of the most well-managed REITs in Hong Kong. Since listing, the owner of suburban retail malls in Hong Kong has managed to grow its distribution per unit (DPU) consistently every year from HK$0.6743 in 2007 to HK$2.7117 in 2019.
That translates to a healthy 12.2% annualised growth. And even amid heightened macroeconomic uncertainty, Link REIT continues to be well-positioned for the future. Here are three reasons why I think it will continue to grow.
Positive rental reversion
Rental reversion in both its Hong Kong and China portfolios were strongly positive. In Hong Kong, Link REIT reported a rental reversion of 22.5% for the year ended 31 March 2019. This is backed by 5.4% tenant sales growth and a low overall occupancy cost of 13.5% to tenants.
Its China portfolio was even more impressive. Overall retail rent reversions were a positive 30.2%, while its office portfolio had rental reversions of 23.8%.
The higher rent secured earlier this year will be a boost to rental income in the next few years.
Prudent use of capital for asset enhancements
Link REIT has also shown its ability to unlock value through asset enhancements. The 11 projects completed in the 12 months ended 31 March had a return on investment (calculated based on the increase in net property income divided by capital expenditure and loss of rental during the upgrading process) of between 13.8% and 35.6%.
Link REIT will reap the benefits of the 11 completed projects in future years. In addition, the REIT has four projects underway that could provide a further boost by early 2020.
Best of all, Link REIT has the financial muscle to grow through acquisitions. As the largest REIT in Hong Kong, it boasts “A” credit ratings from the “big three” credit rating agencies, giving it access to relatively cheap debt. It also has a gearing ratio of just 10.7%, which is well below the regulatory ceiling of 45%.
Link REIT has a great track record of prudent capital recycling, managing to sell non-core assets for higher-yielding investments.
Investors should note that Link REIT does not come cheap. At its current unit price of HK$81.30 (as of the time of writing), it has a trailing distribution yield of just 3.1%. That’s low compared to other REITs.
But that shouldn’t put investors off. Link REIT is well-positioned to grow both organically and through acquisitions and I believe investors who are willing to pay up for it now will likely be healthily rewarded in the future.
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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.