News Alert: Venturing into China’s logistics property market

Link REIT is acquiring a portfolio of three logistics assets in the Yangtze River Delta for RMB947m, or equivalent to c.HK$1.1bn. This marks its second venture in China logistics property market following its acquisition of a 75% stake in two modern warehouses in Foshan and Dongguan back in Oct-21. The transaction is expected to be completed in Jul-22.

The seller, Fujian Dongbai Group, is a Fujian-based state-owned enterprise who mainly owns and operates department stores. The company also participates in logistics, real estate, and manufacturing businesses. As of Dec-21, the company’s logistics projects span a total GFA of 1.84msm with 0.92msm completed and the remaining under construction. Upon deal completion, Fujian Dongbai Group will continue to be the operations manager of the three logistics assets and Link REIT will pay them a management fee in return.

The portfolio consists of three modern warehouses – two in Changshu and one in Jiaxing. Both Jiaxing and Changshu are satellite cities in Shanghai which are 1.5 hours within its economic circle. Therefore, the three assets are strategically located to cater to surging demand from third party logistics, e-commerce and the consumer product sectors and function as regional distribution centres.

Spanning a total GFA of 192,144sm, all three logistics assets are equipped with good building specifications and enjoy excellent connectivity to the Greater Shanghai area through an artery expressway. Both Jiaxing and Changshu South assets are currently fully occupied by reputable tenants with respective WALEs of 1.8 and 5 years. Third-party logistics operators accounted for 70% of the Jiaxing asset with the remainder let to e-commerce players. Meanwhile, the Changshu South asset is fully leased to manufacturers. Construction work of the Changshu North asset has entered the final stage with scheduled completion in May-22. Pre-leasing is making good progress.

The agreed property value of RMB1.1bn represents 2% discount to the appraised portfolio’s valuation as of Mar-22. Assuming the Changshu North property is fully let at a rent similar to the Changshu asset, initial gross rental yield (on cost) is estimated at c.7%. This makes the acquisition yield accretive. Our analysis suggests that this acquisition would increase FY23 DPU slightly by 0.3%. Yet, factoring in the Rmb depreciation, we have lowered our FY23 DPU forecast by 0.7%.

While the acquisition does not have a material impact on its DPU, it augments and diversifies Link REIT’s income and earnings base. In our view, the acquisition strongly aligns with its Vision 2025 strategy. More importantly, it enables Link REIT to tap on the booming logistics market in China. Taking into account the three logistics assets, China logistics assets will make up 1.3% of Link REIT’s portfolio valuation, up from the previous 0.7%. China assets will account for 17% of the REIT’s total valuation. We believe Link REIT will continue on its acquisition strategy with current portion of China and overseas assets falling short of management’s guidance.

Following the acquisition, Link REIT’s pro-forma gearing is expected to increase slightly by 0.4ppt to 25%. There is room for Link REIT to conduct more yield accretive acquisition opportunities.

Link REIT is trading at 4.8% distribution yield for FY22-23. Current yield spread stands at 2%, below its 10-year average of 2.5%. Holding a portfolio of neighbourhood malls, Link REIT is well positioned to benefit from the revival of domestic consumption along gradual easing of social distancing measures since Apr-22. Distribution of electronic consumption vouchers should give an additional boost. This should underpin its earnings recovery in the near term. Link REIT is in acquisition mode which should continue to drive its DPU growth and valuation in the long term. Any positive news flow on the disposal of Stanley Plaza could provide upside on stock. Hence, we maintain BUY with a DDM-based TP of HK$81.80. That said, any faster-than-expected interest rate hike should be among the key investment risks to the stock.