News Alert: First retail development in Hong Kong
• Acquired a non-office commercial site in Kwun Tong via government tender for HK$766m
• Initial rental yield is estimated at 3.7%
• Expect neutral reaction from the market
• Maintain BUY
Link REIT outbid four developers to secure a non-office commercial site off Anderson Road in Kwun Tong through a government tender for HK$766m. This translates into an accommodation value of HK$5,501psf, in line with market expectations.
While Link REIT has been focusing on expanding in Mainland China and overseas in recent years, it is also considering investment opportunities in Hong Kong. In late 2021, Link REIT acquired two carpark/car service centres and godown buildings in Hong Kong. This land acquisition also marks its first retail development project in Hong Kong.
Situated in the Sau Mau Ping area of Kwun Tong, the site is in close proximity to public and private residential housing including On Tat Estate, On Tai Estate and Mount Anderson. Taking into account the nearby public or subsidised housing estate coming onstream, catchment population of the property is expected to exceed 30,000. Hence, Link REIT intends to develop the land into a community commercial facility, which has retail facilities, a fresh market, and carparks, with a total GFA of 139,242sf. The project should be completed before Jun-28.
In the neighbourhood, Link REIT owns the Sau Mau Ping Shopping Centre, Po Tat Shopping Centre and Hiu Lai Shopping Centre. We note that Sau Mau Ping Shopping Centre is one of top ten malls in Link REIT’s portfolio in Hong Kong. It has a total internal floor area of 154,767sf and 611 car park spaces. To be built by the government, a covered pedestrian footbridge and lift system will connect the Sau Mau Ping Shopping Centre and other residential estates in the district to the newly acquired site. We believe this acquisition should strengthen Link REIT’s position in the area by creating synergy and optimizing trade/tenant mix.
Adding construction and financing costs, we estimate total development cost at HK$11,400psf or HK$1.59bn which will be debt funded. Based on our assumed monthly rental of HK$35psf, initial rental yield is estimated at 3.7%. Overall, we believe this acquisition has a neutral implication on unit price.
Including total development costs, Link REIT’s gearing is estimated to increased from 24.9% to c.25.4% which remains comfortable. There is room for Link REIT to gear up for further acquisitions in Hong Kong and overseas.
Link REIT offers distribution yields of 5.2-5.4% for FY23 and FY24. This translates into yield spread of 2.2-2.4%, against its 10-year average of 2.5%. Link REIT is benefitting from a recovery in domestic consumption in Hong Kong with its portfolio of neighborhood malls. Besides, Link REIT reportedly bid for Mercatus retail portfolio in Singapore. Investors are also keeping an eye on the outcome which would dictate the unit price performance. Maintain BUY. Interest rate hike remains a key investment risk, amongst others.