UOB KayHian starts Hong Kong’s REITs and landlords sector at Overweight

Hong Kong street sceneHong Kong street scene

UOB KayHian started coverage of Hong Kong’s REITs and landlords sector with an Overweight rating on rent and capital value growth expectations.

“We expect Hong Kong REITs to transition from being viewed as yield vehicles to being viewed as growth vehicles as property rents and
capital values pick up along with the pick-up in the economy,” UOB KayHian said in a note on Friday.

While the yield spread has fallen to 2.40 percent, below the long-term average of 3.38 percent, it can still compress and even fell to below 1.5 percent during the last upcycle, the note said, adding that indicated a 15 percent potential upside.

Chinese tourists return

It expected the retail sector would see a turnaround as Chinese visitor arrivals and their spending recover.

“Hong Kong’s discretionary segment is likely to outshine the rest of the retail sector on the back of Chinese spending, and landlords with prime luxury malls will be key beneficiaries of the retail turnaround,” it said.

UOB KayHian also said it preferred offices in Central, where the office vacancy rate is under 2 percent, over the rest of Hong Kong.

“With no new supply in the Central area expected to hit the market until 2022, Central rents will continue on an upward trend,” it said. “Conversely, supply of new units in non-Central areas will rise rapidly, especially in Kowloon East. We expect a rental pick-up of 5-10 percent in Central, higher than the 3-5 percent pickup in rents outside of the area.”

Top Picks

UOB KayHian tipped its top buys as Wharf REIC, Link REIT and Champion REIT.

It started coverage of Champion REIT at Buy with HK$6.37 target, pointing to its exposure to Grade-A Central office space.

It started Link REIT at Buy with HK$79.88 target, pointing to a resilient portfolio with consistent strong results.

“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,” the note said.

Wharf REIC was started at Buy with Hk$63.73 target, with the note calling it a direct play on a recovery in Hong Kong’s high-end retail space. It said Wharf REIC was likely to benefit from increased Chinese visitors and the stronger Chinese currency.

UOB KayHian started Fortune REIT at Hold with HK$9.72 target, saying it expected relatively stable distributions per unit (DPU) due to its high exposure to non-discretionary trades. It set an entry price of HK$9.23.

Shares of Champion REIT ended Friday down 1.96 percent at HK$5.50, Link REIT fell 1.44 percent to HK$68.40, Wharf REIC was up 1.50 percent at HK$54.10 and Fortune REIT shed 0.43 percent to HK$9.36.