Link Reit:New kid in town

Tabbing onto Hong Kong’s next CBD.

The newly acquired Kwun Tong commercial site offers Link Reit an opportunity to tab on Kowloon East which is regarded potentially as Hong Kong’s next CBD. We view the acquisition as positive as the deal is yield accretive and will uplift Link’s DPU by 3% upon completion; any additional financing costs incurred in development will be capitalised and thus bring no dilution to existing DPU. We upgrade our TP by 2% to HK$54.5, maintain O-PF.

Office-focused, with some retail elements

Link Reit (60% stake) and Nan Fung (40%) plan to develop the newly acquired Kowloon East commercial site into a grade-A office commercial complex comprising mostly office floors plus some retail elements and carparks. AV HK$6,630psf is 16~39% higher than nearby Swire Prop/Mapletree projects but latters have no/partly seaview. Link’s large floor plain with full seaview & single ownership (nearby seafront are for sale or non-strata titled) will be key appeal for MNC leasing tenants.

Earnings uplift

Prime commercial mixed properties in Kowloon East are leasing at HK$32- 37psf for office and HK$50-400psf/mth for retail. Assuming a monthly rent of HK$35psf, the new project will add HK$118mn to Link’s distributable income (60% stake) upon completion, or 3% DPU uplift. Factoring in construction cost & interest of HK$5,500psf, Link’s financial position will remain solid with net gearing up 2.4ppts from 11% (Sep14) to 13.5%. HK Reit code allows up to 10% of gross asset value on development, Link has now HK$6bn (50% of HK$12bn dev headroom) for other (re)development opportunities.

No dilutions on existing DPU

Total development cost is some HK$10.5bn. The HK$6.4bn (60%) attributable to Link will be funded by debt facilities (@ 3% fixed rate). There should not be a concern on increased financing costs and dilutions on DPU as interests arising from development will be capitalised thus no impact on existing DPU.

Maintain Outperform

The new acquisition is yield accretive and extends Link’s existing real estate portfolio duration (106 out of 174 properties currently managed by Link are over 30 years old). We upgrade our DDM-based TP 2% to HK$54.5/shr factoring in earnings uplift from the new project. Maintain O-PF.