House prices and rents in Hong Kong have continued to rise in recent years, but the ones that have benefited most are not property stocks or rent-collection stocks, but the few real estate investment trusts (REIT).
For example, Home Wealth Industrial Trust (00778), as a REIT listed in Singapore and Hong Kong at the same time, has been rising every year for eight years, and has risen as much as 10 times so far. It not only lags far behind the stock market, but even outperforms the income of direct investment in real estate in Shenzhen or Hong Kong. In addition, Link Real Estate Investment Trust (00823), Hongfu Industrial Trust (00808), Sunshine Real Estate Fund (00435) and Yuexiu Real Estate Trust Fund (00405) also performed well.
(source: Futu Securities)
It is understood that the high long-term rate of return of REIT is mainly due to the following reasons: first, there is a stable rental income, according to the regulations, the real estate of Hong Kong's REIT that does not generate rental income cannot exceed 10% of its assets; second, REIT can enjoy certain tax benefits, so its investment return will increase accordingly compared with other asset classes.
More importantly, Hong Kong law requires Hong Kong-listed REIT to distribute no less than 90 per cent of its net profit to trust holders in the form of dividends each year, making REIT attractive for a high proportion and stable dividend.
Sustained and steady growth and high dividend
Recently, Zifu Industrial Trust announced its latest results, once again handing over a half-year answer with stable growth and high dividend payout to investors.
In the first half of this year, the company's total income and property income rose 2.2 per cent and 3 per cent respectively from a year earlier to HK $978 million and HK $749 million respectively. The growth mainly comes from the steady rent increase rate, the notice said. Excluding the impact of the sale and Fuhui, the total income and net property income of the 16 properties increased by 4.2% and 4.6% respectively compared with the same period last year.
Zhitong Financial APP learned that in February this year, the Home Wealth Industrial Trust completed the sale of Fuhui, with a total proceeds of HK $921 million. Wo Fu Hui, a property acquired by the company in February 2012, sold for HK $2 billion, more than three times the original purchase price five years ago and 88.5 per cent higher than its valuation.
On June 30, 2018, the rental rate of Zifu Industrial Trust was 96%, down 2.1 percentage points from the end of last year, with the largest decline in the home city in Hung Hom, with the rental rate falling to 83.1% from 98.4% at the end of last year.
The rental renewal rate affected by the deployment of tenants in Fujia Lake also dropped slightly to 60.7%, but the rental increase rate of renewal increased to 13.6%, and the average rent increased by 10.87% to HK $45.9 per square foot compared with the same period last year. In other words, in the first half of this year, the rise in rents is the main driving force for the growth of trust income in the rich industry.
The company's total property operating expenses (excluding managers' performance fees) fell 0.5 per cent to HK $206 million in the first half compared with the same period last year, mainly due to a decline in electricity charges during the period, even though electricity tariffs were raised from 2018, thanks to the continued implementation of energy-saving measures. During the period, the company's cost-to-income ratio further improved to 21.1%, the lowest since 2010, reflecting the strong cost control ability of the rich industrial trust.
In terms of dividends, the income available for distribution reached HK $505 million, an increase of 3.7 per cent over the same period last year. During the period, each fund unit was allocated 26.34 Hong Kong cents, an increase of 3.2% over the same period last year. Based on the closing price of HK $9.22 per fund unit on June 29, 2018, the annualized distribution yield reached 5.8 per cent.
Rental income growth tends to slow down
At present, the Home purchase Industrial Trust holds 16 retail properties located in Hong Kong, including a cumulative retail floor area of about 3 million square feet and 2713 parking spaces. Such as the first City of Home purchase, Fortune Ka Wu, Ma on Shan Plaza, Laguna City Shopping Centre, Belvedere, etc. are all properties under the Trust.
The tenants of these retail properties come from different industries, including supermarkets, restaurants, banks, real estate agents and educational institutions, to provide daily goods and services, which can be relatively less affected by the deteriorating economic environment and are both defensive and anti-inflationary.
As a full bet on Hong Kong's local property REIT, Hong Kong's good economic prospects, especially the high prosperity of the retail industry, are still the basis for the stable growth of the Rich Industrial Trust. Zhitong Financial APP noted that the retail industry in Hong Kong experienced a cold winter from 2014 to 2016. Although the occupancy rate of properties owned by the Home Wealth Industrial Trust remained at a high level, the rate of rent increase and average rent increase slowed down.
(source: financial report of the Rich property Trust over the years)
It is understood that the largest asset under the Home Wealth Industrial Trust-Home Fujiahu is carrying out a large-scale asset appreciation measure to transform it into a regional shopping mall. The first phase of the project started in the West Wing in June and the refurbishment of the West Wing is expected to be completed in phases by the end of 2019. In view of the fact that the overall occupancy rate remains basically stable at present, if there is no other significant capital expenditure after the completion of the value-added work of Home purchase Jiahu, then the future growth of the Home purchase Industrial Trust is still mostly driven by rent increases.
Although Hong Kong's retail industry is gradually emerging from the cold winter of the past three years or so, under the background of the impact of e-commerce and the lack of momentum for domestic demand growth, how much room is left for Hong Kong's already high rents to rise? In addition to the sale of Zifu Industrial Trust and Fuhui, Link Real Estate Investment Trust also sold 17 shopping malls for about HK $23 billion last year, setting a record for the largest number of shops in history. is there a deeper meaning behind the sale of property assets that can generate stable rental income by these two companies under low debt pressure? If we want to expand, will the property subject of the next investment still be in Hong Kong?
Some people point out that it is an undeniable fact that the golden age of the Hong Kong retail market over the past 10 years is gone forever. Now it is not easy to find a property with a return of more than 2.85% in the Hong Kong market, so looking for opportunities across the border may be a good choice for a leader that already has a layout in the mainland, but for a rich industrial trust, after the asset appreciation measures of the sale and Fuhui and the purchase of Fujia Lake, its future growth has become more closely related to the rents of shops in Hong Kong.
Like other Reits, the main downside risk of Zifu Industrial Trust lies in interest rate risk. The Fed raised interest rates twice in the first half of this year, raising interest rates by a total of 0.5%. It is expected to raise interest rates twice more this year. The Rich Industrial Trust said it had put in place relevant hedging measures to mitigate the potential financial impact caused by interest rate fluctuations. On June 30, the company hedged the interest rate cost of about 54% of its outstanding debt with interest rate swaps and caps.
At present, the available liquidity of the Rich property Trust is HK $1.797 billion, including HK $700 million in promised but unwithdrawn financing and HK $1.097 billion in cash and deposits. The asset-liability ratio is 22.3%, which is lower than the upper limit of 45% for real estate investment trusts.