The Motley Fool

Better Buy: Link REIT vs. Fortune REIT

Contrary to what some may think, shopping malls are certainly not dying, they’re just evolving. Shoppers now crave meaningful experiences and malls are evolving to provide just that.

Link REIT (SEHK: 823) and Fortune REIT (SEHK: 778) are living proof that shopping malls are not dying but thriving. Both these REITs have seen traffic and tenant sales grow over the last five years, which in turn has translated into a decent rise in rental income.

Shareholders of both REITs have been healthily rewarded in the last five years as well. Fortune REIT’s shares have delivered a decent 31% gain, while Link REIT’s shares have shot up by 93%. Both have paid a growing dividend each year too, giving shareholders reason to smile.

But although Link REIT  has done considerably better in the recent past, which REIT makes a better investment today? Here are some factors to consider.

Business background

Before getting into the downlow, here’s a quick introduction on the pair of shopping mall REITs. On the surface, both REITs have similar businesses, but there are important differences to appreciate.

Most notably, Link REIT is a much larger trust. It owns 131 assets worth HK$218 billion. Fortune REIT, on the other hand, owns 16 assets valued at HK$42.7 billion.

Another thing to appreciate is that Fortune REIT’s portfolio consists entirely of Hong Kong assets, while 13.2% of Link REIT’s assets by value are located in mainland China. With that, let’s take a look at how the two REITs compare in terms of growth potential.

Organic growth

Growth in rental income is what drives the growth in dividends and ultimately its share price. In terms of organic growth, Link REIT has a slight edge. The REIT managed a 22.5% rental reversion rate for its Hong Kong retail portfolio and a 30.2% rental reversion rate in its China retail portfolio. 

Fortune REIT saw lower rental reversions of 7.8% for the six months ended 30 June 2019. Because of its higher reversion rate, Link REIT will likely see faster organic growth over the near future.

Winner: Link REIT

Growth through acquisitions

Another thing to consider is which REIT has greater financial flexibility to make acquisitions. Once again, I believe Link REIT edges out Fortune REIT in this respect.

Link REIT boasts an extremely low gearing ratio of 10.7%, while Fortune REIT has a slightly higher gearing ratio of 20.5%. Although both REITs have gearing ratios that are well below the 45% regulatory ceiling, Link REIT has greater financial flexibility to take on more debt for yield-accretive acquisitions.

Link REIT also has expertise in investing in real estate in China, which could provide it with more investment opportunities to flex its financial muscle.

Winner: Link REIT

Valuation

A suitable valuation metric for real estate investment trusts is the distribution yield. At the time of writing, Link REIT’s unit price of HK$85.50 translates to a distribution yield of 3.1% whereas Fortune REIT’s share price of HK$8.99 gives it a distribution yield of 5.7%.

All other things equal, Fortune REIT has a more attractive valuation.

Winner: Fortune REIT

Final call

Although Fortune REIT has a higher yield and decent growth prospects, its growth potential is inferior compared to Link REIT’s.

It’s a tight call and I believe both REITs will perform well in the next five years but because of its superior growth potential and favourable track record, I believe Link REIT is a slightly better option at the moment.

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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 owns shares in Fortune Real Estate Investment Trust.