- Landlords may provide rent relief reminiscent of 2020 upon continued disruption from lockdowns
- Rent reliefs will likely be more impactful to sentiments rather than fundamentals
- Corrections from rent relief would create decent entry window to accumulate quality names – Longfor (960 HK) and CR Land (1109 HK)
Landlords likely to offer rent relief. With the government’s intention to support medium, small, and micro-enterprises along with the likely continuance of lockdowns and/or restrictions to contain the COVID-19 resurgence, we believe landlords will soon offer rent relief for their tenants like in 2020. Thus, we conducted an earnings sensitivity analysis to gauge the earnings impact on landlord developers under the offering of a 2 to 6 month rent relief on affected malls.
Focusing on Longfor and CR Land for our sensitivity analysis. We have focused on Longfor (960 HK) and CR Land (1109 HK) – the two leading landlords in the sector – in our analysis. Having mapped their current mall locations and respective lockdown statuses under COVID-19 restrictions (refer to charts on pg 3-4), we identified that Longfor and CR Land have 30% and 37% of the malls in GFA that are fully unaffected, 49% and 24% currently under different levels of lockdowns, and 20% and 40% that were affected by lockdowns but have resumed normal operations, respectively.
Likely more impactful to sentiment than on fundamentals. Our analysis indicates that Longfor and CR Land’s earnings will only be impacted by c.0.1%-0.3% and c.0.2%-0.6% respectively, assuming shopping malls that are in currently affected cities will not contribute 2-6 months of turnover rents. The impact would be higher, but remains manageable at 1.1%-3.3% for Longfor and 0.8-2.4% for CR Land if we assume rent relief will be provided for currently affected malls, or 1.5%-4.6% and 2.2%-6.6% even if they provide rent relief to all of the currently and previously affected malls. Impacts will likely be even less if we factor in “revenge spending” once cities reopen and potential subsidies from governments.
Share price correction in reaction to rent relief announcement, if any, would offer decent entry point. We believe the earnings impact from the offering of rent-relief should create a manageable earnings impact as per our sensitivity analysis. We therefore believe share price corrections, if any, in the event that Longfor and CR Land announce rent relief would create decent entry points for investors to accumulate.