The REIT in May announced plans to acquire three warehouses in the mainland provinces of Zhejiang and Jiangsu for 947 million yuan (US$140 million). This follows last October’s purchase of two logistics centres in Guangdong Province, which rivals Shanghai as a freight centre.
“The limited supply of world-class modern warehouses at prime locations presents attractive upside potential with the continued rise of e-commerce and demand for modern logistics services,” CEO George Hongchoy said, adding that “we are set to capture the robust growth momentum of this budding industry”.
The trust also is considering investment in Singaporean malls, Bloomberg reported recently. The portfolio worth 4 billion Singapore dollars (US$2.9 billion) would be Link’s largest overseas deal to date.
Japan, where the weak yen has created bargains for foreign investors, is on the trust’s radar as well.
“We have been looking for opportunities in a few of our targeted markets – namely Australia, UK, Singapore and Japan,” a Link spokesperson told Nikkei.
Link, valued at US$17 billion, accounts for more than 60% of Hong Kong’s REIT market. Its speciality is renovating ageing commercial buildings, raising rents and bringing in new tenants.
The trust first ventured outside Hong Kong in 2015 by acquiring a Beijing mall. At the end of March 2022, 75% of its portfolio was in Hong Kong, 17% in mainland China and 8% in other markets such as Australia and the UK.
Link aims to lower Hong Kong’s share to 60%-70% by 2025, with 20%-25% on the mainland and 10%-15% elsewhere.
The change of tack reflects a murky outlook for the trust’s Hong Kong-centred growth model.
Link has increased its dividend distribution every year since listing in 2005, but the pace of growth has slowed markedly. Its share price reached as high as 10 times the offering price before languishing since 2019’s mass protests in Hong Kong.
The REIT now seeks to sell Hong Kong properties with limited prospects for further growth, while acquiring assets outside the territory.
Diversification “can enable it to avoid the risks of overconcentration”, said Kenny Ng, a strategist at Everbright Securities International, citing the example of offices compensating for malls hit by a coronavirus outbreak.
Conditions are tough in Hong Kong real estate. More families have been moving abroad since Beijing enacted security legislation covering the territory in 2020, and China’s strict “zero-Covid” policy is driving out foreign companies, mainly in finance and technology.
Property investment here dropped 15% on the year to 28.9 billion Hong Kong dollars (US$3.68 billion) in the first half of 2022, according to Colliers International, only about one-fifth of the most recent peak in 2018. CBRE puts the vacancy rate for grade A office space at 11.9%, the worst since 2003.
Other markets look more profitable. The cap rate, a measure of potential returns, on Link retail properties ranges from 3.1% to 4.5% in Hong Kong, but from 4.25% to 4.75% in mainland China.
Link REIT in May announced plans to acquire a logistics centre in China’s Zhejiang Province.
Some industry insiders suggest Link’s pivot also ties into the trust’s image in Hong Kong as a real estate hegemon unfriendly to small businesses.
The REIT has been criticised as indirectly burdening consumers through high store rents. The Alliance on the Development of Public Markets estimates that food is on average 23% more expensive at Link-owned markets in Hong Kong’s Tin Shui Wai district than at competitors.
The nongovernmental organisation Link Watch last week issued recommendations including a ban on property resale transactions and tighter regulation of REITs. Link could come under fire from China’s government, which has made improving the quality of life in Hong Kong a priority.
Meanwhile, competition for good mainland properties is intense.
“There’s more and more interest” in the logistics property sector due to e-commerce, “but it only started three to four years ago”, Hubert Chak, CEO of SF REIT and a former chief financial officer at Link, told Nikkei Asia.
SF REIT in June acquired a logistics centre in the inland province of Hubei from its main sponsor, SF Holdings, for 493.2 million yuan.
“If you look at the market, there are a lot of funds and investors going into the logistics sector today,” Chak said. “There are competitions for good-quality assets. It’s very high. I can see the prices getting higher.”
As Link “moves from growth to maturity, it is inclined to focus on stability through diversifying its investments,” said Etsuro Akiyama, head of the REIT group at Sumitomo Mitsui DS Asset Management. But “every REIT is diversifying, too, so it’s important to take opportunities in the mainland for growth”.