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The largest REIT in Asia by market capitalisation, Link REIT (SEHK: 823), has an enviable track record of both dividend growth and capital appreciation in its share price over the long term.
No doubt, Link REIT’s stock has been a favourite of Hong Kong investors for some time. I would include myself in that cohort, having added it to my portfolio last year amid the anti-government protests in Hong Kong.
My initial investment case for Link REIT was that, despite the protests, its everyday suburban shopping malls and car parks (as well as office properties) would hold up well.
Indeed, remarkably, Link REIT still managed to raise its distribution per unit (DPU) for FY 2020 (the 12 months ending 31 March 2020).
However, the Covid-19 pandemic and geopolitical considerations have upended the investment case for me. Here’s why I sold out of my Link REIT shares a few weeks ago.
Covid-19 disrupts property
Unsurprisingly, questions are being asked about the future of property in the age of coronavirus and beyond. Genuine global crises, such as the Global Financial Crisis in 2008, tend to mean a major disruption or repositioning of megatrends.
A new way of thinking has set in among corporates globally. Primarily, do they need to have office space given the increasing rise of remote working?
Granted, this will have a limited impact on Link given its minimal exposure to property – after its recently-announced acquisition of a London property in Canary Wharf it will have around 10.8% of its assets (by portfolio value) in the office segment.
However, the fact that Link REIT is looking to expand into the office sector in Europe during the time of Covid-19 doesn’t fill me with confidence.
Turning to Hong Kong, the REIT is highly concentrated in the city with nearly 84% of its existing assets located there. Meanwhile, Hong Kong retail makes up a whopping 63.7% of its exposure.
With the latest stringent containment measures announced by the Hong Kong government – in the wake of a “third wave” of infections in the city – the retail sector is going to take a massive hit.
Despite its generally resilient properties, Link REIT won’t avoid the pain as question marks remain over the financial health of tenants in the medium to long term.
There are much better REITs to access in the Singapore market, that are riding on strong structural tailwinds such as e-commerce and data centres.
The ratcheting up of tensions between the two world superpowers has seen Hong Kong caught in the middle.
The draconian national security law that Beijing imposed on Hong Kong at the beginning of July has further increased tensions between China and the US.
With legitimate fears of a “brain drain” of talent from the city, there are worries that Hong Kong’s place as a global financial centre could be in jeopardy.
The inequality in the city has also shone a spotlight on property developers and landlords, including Link REIT, who are accused of placing profit above all else.
Popular discontent with large Hong Kong-focused corporations that are “rent-seekers” and run quasi-monopolies (in many cases) could spell future trouble for Link REIT and others.
Add to your winners
Fortunately, I didn’t have a very large position in the stock and, although I took a small loss, I felt more confident being able to allocate that capital to higher-conviction holdings in my portfolio.
Being able to “add to your winners” is something The Motley Fool preaches and this is certainly true for myself.
Selling out of small positions in “losers” in your portfolio is a great way to reallocate your capital to better companies and earn a higher long-term return at the same time.
Foolish bottom line
Overall, the rising China-US tensions and the structural disruption caused by Covid-19 contributed to me selling out of my position of Link REIT shares.
As the Covid-19 pandemic highlights the structural shift in global economies, it’s starting to become clear who the winning companies will be.
Likewise, in Hong Kong, it’s also clear where the “losers” will be. In an economy that has been traditionally dominated by finance and property, the emergence of “Big Tech” stocks from China means there’s a new way of investing for the future.
For my own portfolio, I’m staying well away from any financial- or property-related stocks that have the majority of their business in Hong Kong.
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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 Tim Phillips doesn’t own shares in any companies mentioned.