Link feels yield pressure as income rises 11pc

PUBLISHED : Saturday, 07 June, 2008, 12:00am
UPDATED : Saturday, 07 June, 2008, 12:00am

The Link Real Estate Investment Trust posted an 11.1 per cent jump in annual income, but is still under pressure to lift rents faster at the former publicly owned shopping centres and car parks it now controls.

While analysts say the trust will continue to benefit from rental increases and improvement works, many voiced disappointment at the return to investors.

The property trust, which owns 180 retail and car parks properties formerly owned by the Hong Kong Housing Authority, said total distributable income in the year to March 31 was HK$1.6 billion, compared with HK$1.44 billion the previous year.

A final payout of 38.29 HK cents per unit was declared, up from 34.62 HK cents. Together with the interim distribution of 36.11 HK cents, the annual distribution of 74.4 HK cents represents an annualised yield of 4.3 per cent based on its closing price of HK$17.26 on March 31.

'The return is no good,' said an analyst who declined to be named. 'Because investors expect it will benefit from rental [increases], they are willing to buy [its units] at a premium, in turn pushing down the yield.'

The Link Reit has been attacked by activist shareholders such as The Children's Investment Fund for not raising rents quickly enough. But they have faced stiff opposition from some directors who argued small to medium-sized retailers, who form the backbone of many of the former government-owned malls, could not afford hefty rental increases. Because of the internal strains, Paul Cheng Ming-fun stepped down from his position as chairman in April last year, a year before his contract expired, while former chief executive Victor So Hing-woh decided not to renew his contract last July.

The Children's Investment Fund, which holds an 18.35 per cent stake in the trust, has reportedly urged Link to sell some properties to capture capital gains. However, Link Reit chairman Nicholas Sallnow-Smith said there were no plans to sell assets.

Average rents rose 6.9 per cent to HK$27.70 per square foot while renegotiated rental contract rates climbed 22.64 per cent due to a low base in the previous agreements.

'The 6.9 per cent growth is a bit slower than the market average of about 10 per cent,' said Tony Lo, a sales director at the retail department of Midland IC&I. 'This is largely because it is putting its priority on improving the mix of tenants rather than rental increases.'

Mr Lo said there was still an enormous potential for rental increases when the Link brand image improved, which would also help to boost the sales of its tenants.

The property trust said the occupancy rate of its total retail portfolio edged down from 90.3 per cent to 89.3 per cent, while carpark utilisation rate stood at 71.2 per cent.

Tenancies with turnover rental clauses had risen from 561 to 976, allowing it to benefit from the buoyant retail market, said an analyst. A turnover rental clause is an agreement in which tenants share some of their earnings with the landlord if turnover reaches a certain amount.

Mr Sallnow-Smith said the trust would continue upgrading its facilities to boost rents. Asset enhancement works at five shopping centres had been completed by the end of March, and work at 20 other shopping complexes were underway.