Hong Kong Property-Land pusher: REIT the new player

Sold!

The land market is getting more competitive nowadays with local developers, mainland developers, constructors and REITs participating. A consortium (60/40) of The Link REIT (823 HK, HK$53.20, Outperform, TP: HK$51.90, Kai Tan) and Nanfung (unlisted) was successfully awarded a commercial site in Kwun Tong. The total land sales value of the site is HK$5,860m, equivalent to AV of HK$6,630 psf based on total GFA of 884k sqft. Eleven developers participated in the land auction. The price was 16% higher than the market estimates of HK$4.42bn -5.04bn. According to Link REIT, they are planning to develop a commercial complex consisting of offices and a shopping mall for long-term rental purposes.

Implication

Largest retail-focused REIT entering into land market. We are surprised to see The Link REIT, the world’s largest retail-focused REIT in terms of market cap with portfolio of 11m sqft of IFA, enter into the office land market. Under the REIT code amendments of 2014, Link REIT can make use up to ~HK$13bn of its balance sheet capacity (10% of GAV) for undertaking property development investments. We estimate the company can invest another ~HK$8bn in the land market post this investment.

Wheelock group the major beneficiaries. With the Kwun Tong commercial land site selling at an AV of HK$6.6k psf, we view Wheelock Group one of the major beneficiaries. Its adjacent redevelopment project, Wharf T&T Square (GFA of 513k sqft), was paid at a land premium of HK$1.3k psf in 2011. The Group also owns Kowloon Godown (GFA of 829k sqft), which is right adjacent to the site and is currently under negotiation with the government for usage conversion. Earlier in March 2013 and June 2014, Wheelock sold the West and East Tower of the One Bay East project at HK$4.5bn and HK$5.4bn, or ASP of HK$8.8k psf and HK$10.6k psf respectively.

Better than peer execution needed. Assuming a construction cost of HK$3.5k psf, total investment cost of the project would reach HK$9.0bn (HK$10.1k psf). Assuming 1) GFA split of office/retail at 60%/40%; 2) a comparable rent of HK$35 and HK$60/sqft/ month; 3) occupancy rate of 95% and cap rate of 5%, the implied value is HK$8.6bn. Better-than-peer execution of The Link REIT/Nanfung would be the key to deliver the value accretion, in our view.

Up for sale

Upcoming land sales will be Yip Wong Street residential site in Tuen Mun, providing total GFA of 86k sqft on 30 Jan. Given its relatively small scale, we expect it will not be market-significant. In contrast, the land tender of the Lung Cheung residential site in Beacon Hill would be of higher importance. It could offer an indication on developers’ outlook on the luxury residential market, in our view.