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Background

On 17 June 2020, the management from Link REIT (0823) proposed amendment of the scope of permitted investments under Link’s investment policy. The manager proposed to allow investments in all real estate classes by removing the restriction on investments in the Currently Excluded Properties which include residential, hotel or serviced apartment nature. The proposal was passed on 2020 annual general meeting. By changing the investment policy, how can the management improve the value of Link REIT?

Current Portfolio of Link REIT

As shown in Link’s website, Hong Kong retail facilities and Hong Kong car parks already constitute 81.1% of the portfolio. By geography classification, 85.5% portfolio are located in Hong Kong, 12.8% from mainland China and only 1.7% from oversea. It shows that Link REIT’ is highly correlate to Hong Kong retail market. It also have excessive risk espouse to Hong Kong ‘s economy.

On 24 July 2020, Link REIT announced an acquisition of office property in London. This move show that the management are starting to diversify the current portfolio which can reduce the excessive risk espouse to single economy.

Benefit from changing the investment policy

By changing the investment policy, Link REIT can enter residential, hotel or serviced apartment business, but how would this move improve the value of Link REIT? By comparing Link REIT with a pure hotel REIT may provide an answer.

Regal REIT (1881) is a pure hotel REIT listed in Hong Kong Exchange. Its business mainly make up from nine hotels in Hong Kong. By comparing Regal REIT with Link REIT, the main different are gross profit margin as shown below.

Over the past five years, Link REIT have improved its gross profit margin from 73.4% to 76.6%. However, Regal REIT was enjoying 96% gross profit margin over the same period. It shows that hotel business has a better earning ability than retail facility, car park and office business. By entering residential, hotel or serviced apartment business, Link REIT ‘s gross profit margin is expected to improve.

What to expect Link REIT in future?

In future, Link REIT may acquire more residential, hotel or serviced apartment business. Link REIT may also diversify its business by geographical location in order to reduce excessive risk espouse to single economy. Overall, the gross profit margin and net income are expected to improve. As a result, income available for distribution and dividend rate are expected to be boosted in future.

Investment Disclaimers


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