Property trust wins industry applause

PUBLISHED : Wednesday, 17 November, 2004, 12:00am
UPDATED : Wednesday, 17 November, 2004, 12:00am

Fund managers have hailed Hong Kong's first real estate investment trust (reit), describing the instrument as a high-return, low-risk investment.

Analysts expect Link Reit to offer annual cash dividend yields of up to 7 per cent - more than enough to compensate for the potential downside risk of the investment trust's unit trading price.

Link Reit will bundle a portfolio of assets, including 151 retail properties and 79,000 parking spaces spun off from the Hong Kong Housing Authority.

The reit is scheduled to list on the main board on December 16.

'Link Reit is almost like a must-buy. It is very attractive amid the low interest-rate environment,' one fund manager said.

That said, some are concerned that Link Reit might be susceptible to social or political factors after it was privatised, much like the MTR Corp.

Given its public-sector legacy, the reit might have trouble raising rents or cutting labour costs, rendering the privatised entity unable to function entirely like a commercial concern, another fund manager said.

Tenants from 107 retail properties in the Housing Authority's shopping centres recently sought assistance from legislative councillor Albert Cheng King-hon and 23 other democratic legislators to express their concerns about potential drastic rental rises and refurbishment costs after the listing.

'These tenants have not been consulted or given any commitment regarding their future tenancy terms after the privatisation,' Mr Cheng said.

He said the tenants wanted tenancy terms to remain unchanged for five years, and for Link Reit to subsidise refurbishment costs for the shopping centres.

But a source said the Housing Authority was expected to provide housing subsidies to citizens only, not retailers.

Credit Suisse analyst Desmond Tjiang wrote in a research note that government-run shopping centres had been poorly managed, with rents standing at less than half those of shop centres owned by private landlords.

'But cost-to-income is significantly higher, with 50 per cent for [the Housing Authority] against 30 per cent for private landlords,' Mr Tjiang said.

Nonetheless, Link Reit will be a fully privatised entity and will not need government approval to raise rents, although it must adhere to the terms of existing tenancy agreements until they expire.

'I don't believe execution risks will be a big issue,' a fund manager said. 'Once Link Reit is privatised with a 100 per cent free float, public shareholders will expect its management to run the business commercially and efficiently to enhance shareholder value.'

Some suggest raising rentals is not the only means by which the reit can improve rental income.

Daiwa Asset Management fund manager John Koh said the reit management could better utilise the shopping areas by renting space for special events and cutting back on empty spaces.