June 7, 2017 11:19 pm JST

Asia's largest REIT nears investment limit

Link REIT to diversify from local malls to offices in Hong Kong

JENNIFER LO, Nikkei staff writer

Link Asset Management Chairman Nicholas Allen, center, and Chief Executive George Hongchoy, right, deliver annual results on June 7. (Photo by Jennifer Lo)

HONG KONG -- Link Real Estate Investment Trust, Asia's largest REIT by market capitalization, is a step closer to reaching its overseas investment limits after it completed its third acquisition in mainland China.

Link REIT acquired the Metropolitan Plaza mall in the southern Chinese city of Guangzhou for 4.1 billion yuan ($603 million) last month, a deal that boosted its mainland assets to account for 8.8% of its business portfolio.

The Hong Kong-listed REIT has an internal guideline to limit its mainland and office leasing exposure to less than 12.5% of its total portfolio value, suggesting that it might slow its overseas expansion.

George Hongchoy, chief executive at the REIT's manager, Link Asset Management, stressed that the investment cap was not a regulatory requirement. "It's just because in the short-run, we believe this is an appropriate way to manage risks," he told reporters on Wednesday.

Link REIT has tried to diversify from being a manager of legacy assets, primarily public housing malls and wet markets in Hong Kong, to a real estate investor. On the mainland, it bought a shopping mall in Beijing and two office towers in Shanghai for a total of 9 billion yuan last year.

In Hong Kong, it owns a portfolio of 150 retail properties but is making forays into the commercial office market. It announced on Monday to join forces with local developer Nan Fung Group to build Quayside, a grade-A office project in the budding commercial district of Kwun Tong in Kowloon East. An anchor tenant will be investment bank JP Morgan, which will pre-lease a quarter of the office space after it completes in 2019.

The Quayside project came a year after Link REIT's attempt to develop a "new retail landmark" -- a vertical Ginza-style complex comprising shops and offices in the shopping district of Mong Kok by the end of 2017.

"Different property types have different rental cycles, so having a mix of them in our portfolio helps to diversify risks," said Hongchoy, justifying the company's venture into the office market.

Last year, Link REIT disposed of 14 properties for 7.3 billion Hong Kong dollars ($938 million) as part of its "capital recycling" strategy to "fund new investments in quality assets."

While Hong Kong's retail sector is facing greater headwinds with fewer mainland visitors to the territory, Link REIT reported stronger annual results -- thanks to high rents imposed on tenants. Its annual net property income reached 6.99 billion Hong Kong dollars last year, up 7.4% from a year ago.

Revenue rose 5.9% on the year to HK$9.26 billion last year, driven by a 4.2% increase in retail rental. Its three-year lease was up 24%, equivalent to an average rental increase of 8% every year for tenants.

"Our focus on non-discretionary retail has meant that our results have been quite good," said Nicholas Allen, chairman at Link Asset Management. Despite a public outcry over rising rents, he said that their major tenants, mostly in the mass-market retail targeting local consumers, have been less affected by the downtrend.

Asked about the company's plans, Allen said: "You shouldn't expect that we would just remain with the properties we currently own ... We are looking always both at acquisitions and disposals."

Investors responded positively to the results announced during lunch break on Wednesday. During the afternoon session, its share price hit an all-time high of HK$62.25. The stock, however, closed the day at HK$61.65, unchanged from the close on Tuesday.

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