Hopes - and fears - about The Link are overblown

PUBLISHED : Wednesday, 31 January, 2007, 12:00am
UPDATED : Wednesday, 31 January, 2007, 12:00am

Two events in the past two days do not bode well for commercial tenants in housing estates who turned out yesterday to protest against rent increases. The first is the resignation of Paul Cheng Ming-fun as chairman of The Link Real Estate Investment Trust with a year of his contract still to run. The second is the positive response of the stock market to news of Mr Cheng's departure, and his replacement by the outgoing chief executive of Hongkong Land Holdings, Nicholas Sallnow-Smith.

Investors put their money on the prospect that under new management from April 1, The Link will be run according to a more market-driven and profitable model. It can be expected to extract what the market will bear from rents at its 151 shopping centres and from charges for its 79,000 car-parking spaces. Yesterday's protest against rises in below-market rents and service charges inherited from the Housing Authority is unlikely to be the last.

The Link Reit credited Mr Cheng with having established a strong foundation for growth. But his departure at the end of March is seen as a victory for investors who wanted a management shake-up as a means of securing better and faster returns. Chief among them was the innocuously named but predatory The Children's Investment Fund Management (TCI), a hedge fund which has accumulated an 18.35 per cent interest in the city's largest reit.

Some critics claim The Link Reit is trying to force small retailers who cannot afford rent rises to leave its estates. The latest developments raise once again the question of whether The Link Reit, having taken over the shopping malls and car parks in public housing estates, has also taken over social responsibilities - for example, to keep a lid on costs such as rent that retailers pass on to public housing tenants.

Having been listed, The Link Reit must be run like any other public company, with the aim of achieving the best possible returns for its shareholders. That is the price the community must pay for unlocking the value in poorly managed public assets by selling them into the trust.

In the end the market will set the rents for shops and car spaces. The malls are unlikely to be able to support upmarket retailers. So smaller businesses, such as pharmacies, that provide services for which there is a need, need not fear too much that they will be driven out. In any case, it is debatable whether retailers passed on to customers the benefit of below-market rents in the past.

TCI and like-minded investors have not finished shaking up The Link Reit to create a company worth much more to unit holders. They can rely on the support of the institutional shareholders who account for a big majority of the units. With a politically sensitive clientele, however, landlord and tenant can be counted on to keep each other on their toes.