Heated property sector buoys prime retail and office REITs

Wharf REIC, Link REIT and Champion REIT are in for a good year ahead.

Real estate investment trusts (REITs) are set to level up from yield vehicles to growth vehicles this year as Hong Kong’s property sector shows no sign of slowing down with capital values on a steep climb, according to UOB Kay Hian.

Also read: Investors turn to prime property as trade war threat dims outlook for other assets

“Although yield spread has dropped below the long-term average of 3.38% to 2.40%, it still has more room for compression, given that HK yield spread has compressed to below 1.5% during the past upcycle, indicating over 15% upside potential,” said analyst Vikrant Pandey.

Returns from US and Hong Kong REITs were also positive during rate hike cycles, with both nearly doubling from mid-04 to end-06 when the US FFTR rose 425bp from 1% to 5.25%.

REITs with exposure to high-end retail and Central office space are poised to benefit in particular amidst an improving sentiment buoyed by a rebound in visitor arrivals and higher rents. Following this train of thought, OCBC notes that Wharf REIC, Link REIT and Champion REIT are its key buys.

Here’s more from UOB Kay Hian:

We initiate coverage on Champion with a BUY and target price of HK$6.37. We like Champion’s exposure to Grade-A Central office space in Hong Kong (60% of IP portfolio valuation), especially with the current Grade-A office supply shortage in Central. There is ample room for growth for its Grade-A office tower in terms of rent and occupancy rate. Champion could unlock over HK$2.8b from a potential sale of its Langham Place office tower.

We initiate coverage on Link with a BUY and target price of HK$79.88. We like Link REIT for its resilient portfolio coupled with its ability to produce strong results consistently. Link still has headroom for rental growth due to the disparity with market rents, and has the potential to achieve growth through asset enhancements. We view the recent pull-back in share price as a good opportunity to accumulate.

We initiate coverage on Wharf REIC with a BUY and target price of HK$63.73. We like Wharf REIC as a direct play on the recovery in HK high-end retail space. The resurgence in Chinese visitors is likely to benefit Wharf REIC as it has higher exposure to discretionary retail with its prime malls like Harbour City and Times Square. Timeliness of the stronger renminbi is likely to fuel Chinese spending in Hong Kong. The increase in discretionary spending is also on the back of a strong economy.