The best retail real estate investment trusts (REITs) are typically underpinned by the busiest shopping malls or outlet centres in prime locations.
Asia’s biggest REIT in market capitalisation terms, Hong Kong’s Link, is unusual in this regard. Many of its underlying properties are wet markets and car parks attached to the territory’s public housing estates. Daily spending from residents of these lower-income communities supports the bulk of its rental income.
That’s why when the Hong Kong government decided to spin off Link in 2004, the news sparked legal challenges from activists who argued that the privatisation plan violated the government’s duty to provide affordable amenities to public housing tenants.
The Link REIT eventually went public in 2005 and its market value has since jumped by a factor of more than seven.
The investment trust is now straying further from its roots as the company seeks to expand beyond its Hong Kong base. Earlier this month, it announced that it will be acquiring three warehouses in China for Rmb945 million ($142 million) from Fujian Dongbai, a Shanghai-listed retailer.
Located in Zhejiang and Jiangsu provinces, the three properties encompass a lettable area of nearly 200,000 square metres, giving the previously retail-focused REIT an opportunity to broaden its business into China’s fast-growing logistics sector, which serves as the backbone of China’s enormous e-commerce market.
In October last year, Link made its first move in this direction by acquiring a 75% interest in two new warehouses in Dongguan and Foshan for Rmb754 million.
“Link will have a presence in two highly sought-after logistics hubs in China, namely the Yangtze River Delta and the Greater Bay Area,” the company said in a statement this month of the latest investments.
Link has been expanding on the Chinese mainland since 2015. Besides the recent acquisition of the logistics assets, it also forked out nearly Rmb6 billion last year to buy two retailing properties in Shanghai and Shenzhen respectively. As of April, the mainland market accounted for 16.5% of its property portfolio (up from zero in 2005) on a pro-forma basis, compared with 75.9% of its assets in Hong Kong (it also owns properties in Sydney and London). Link’s expansion plan has caught the attention of Chinese media outlets. Jiemian, a news portal, noted that the Hong Kong firm is now Asia’s most valuable REIT (with a market value of nearly $20 billion) and its acquisition strategy is similar to other real estate-focused investment funds.
“We are glad to see that the market was surprised to realise that Link would also invest in logistics, apart from malls and offices,” a senior executive at the company told Guancha, another news site, in an interview.
As regular WiC readers will know, a handful of Hong Kong’s biggest developers have dominated the territory’s property sector for decades. Yet few of them have been particularly successful across the border in mainland China.
Link is hoping it will be an exception. Its investment in logistics assets could be complementary to its retail portfolio. Better still, the company’s senior management told investors that some of its biggest tenants in Hong Kong want to expand in other parts of the Greater Bay Area – a region that Link is targeting – as well. For instance, Café de Coral, Hong Kong’s biggest fast-food chain for Chinese cuisine, is a major tenant in many of Link’s local malls and it also operates more than 100 outlets in mainland China.
A focus on anchor tenants such as Café de Coral has supported much of Link’s success in Hong Kong. Nevertheless the strategy has been criticised by locals for driving up rents and killing off smaller mom-and-pop stores. Link may want to avoid that reputation in the mainland market, given the new prominence of ‘Common Prosperity’ on the policymaking agenda.
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