Jake's View

Link Reit buy-back idea offers public a new lease on loss

PUBLISHED : Tuesday, 28 August, 2012, 12:00am
UPDATED : Tuesday, 28 August, 2012, 5:10am

Do you agree the government should buy back shares in The Link Reit to lower the rents of local businesses?
SCMP survey question

Here is an idea that would do nothing to lower the rents of local businesses but a great deal to sting the public purse for another big loss. Let's start by setting the history of The Link Reit in perspective.

About 10 years ago the government decided to close its subsidised sale housing programme, the Home Ownership Scheme (HOS), as home prices had fallen so much over the previous five years that buyer subsidies were no longer considered necessary.

This raised a difficulty for the Housing Authority, which relied on income from HOS sales to build its public rental housing. Its solution: bundle up the housing estate shopping malls and car parks as a separate company and sell shares in it on the stock market. That would cover the costs of public housing construction for years to come.

Privatisation was still in the air back then and the fashion in privatisations was the real estate investment trust (reit), an American tax dodge whereby almost all the profits of the security are paid out as dividends. Reits had little real application here but fashion is fashion and The Link was made a reit when floated in 2005.

But the authority made one fundamental miscalculation. It thought it could sell all the units in the reit to the public and still retain control. A British fund manager, Chris Hohn, knew otherwise. He saw opportunity and, primarily through his Children's Investment Fund, bought an effective controlling interest and put in his own management. What Mr Hohn saw was that the authority had woefully undervalued its shopping malls. It treated them as a form of social welfare and had kept the rents much too low, which gave it scope to choose its preferred tenants.

It chose badly. Aside from the obvious provisions outlets and eateries, most of the shops in these malls sold low-margin plastic knick-knacks and were under-patronised. The malls were also not kept up to modern standards and looked tacky even when reasonably maintained.

And so, The Link got busy refurbishing the malls and raising the rents to bring in a different range of tenants. This, of course, violated what public housing tenants (average rent HK$1,200 a month) see as a basic law of the universe - the world owes me a living. Their big complaint is that nearby residents don't want and can't afford the goods now offered in these shops. This is obviously false. The higher rents are paid - it would not happen if the shops were not well patronised. The fact is that they are now brighter, more crowded places. The political activists may whine, but the shoppers shop.

The Link has also done a good job of jacking up revenue from its big portfolio of car parks (80,000 stalls). These housing estate car parks were notable in the past for the high proportion of expensive cars in them. Think of a socially conscious reason, if you can, why Mercedes owners should have cheap car parks.

Mr Hohn has now largely backed out of The Link. The biggest unit holders are one Australian and three American financial institutions. But the underlying strategy remains in place - renovate, raise rents to market level and look for good acquisitions. The unit holders have no reason to complain.

And now here is my big question: just how will the government lower the rents of local businesses by buying back shares (technically units)? I ask you because I haven't the foggiest notion of how this would work.

I suppose the idea is that the government should take back control of the board and halve all rents on the spot. Tell me just how this would force landlords on Nathan Road to cut rents.

My guess is that The Link malls would once again become dingy halls of plastic rubbish merchants and Nathan Road rents would go up as shoppers fled to shops that attracted them. But to do it the government would have to make a general offer for The Link and, don't delude yourself, every unit holder would take it up, given the stated intention of destroying the earnings.

At the present unit price, that would cost us about HK$77 billion. What a ridiculous idea.