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Morningstar | Retail Asset Acquisition in Shenzhen at Reasonable Price for Link

Link REIT announced the acquisition of Central Walk, a retail mall in Shenzhen, for CNY 6.6 billion. This is the company’s fifth acquisition in China. The acquisition price represents a gross yield of 5.6%, based on a passing rent of CNY 23.8 million in recent months. The net property income yield based on 2017 results was 3.6%. We believe the acquisition price is reasonable, given potential scope for asset enhancement. The company’s shares have risen sharply during the past month as the interest rate hike pressure eased. The shares are now trading at a distribution yield of 3% and above its book value. We believe the shares are overvalued at this point. We maintain our fair value estimate of HKD 70 along with our narrow moat rating.

Central Walk is located in the Futian District of Shenzhen. It has a total retail gross floor area of 83,900 square meters and 741 car parking spaces. The mall opened for business in 2006, with lease expiries of 26% and 25% in 2019 and 2020, respectively. Given the asset’s age, we expect there to be significant scope for asset enhancement and positive rental reversion under Link REIT’s management. However, the upside is tempered by the asset’s short remaining lease term of 23 years.

For the previous acquisitions in China, gross yield was 4.6% for Corporate Avenue, 6.3% for EC Mall, 4.7% for Metropolitan Plaza and 4.8% for Jingtong Roosevelt Plaza. While Corporate Avenue is a high-quality office asset in a prime location, the other three are comparable retail assets. This is especially true for Metropolitan Plaza, given its size and remaining lease term. While Central Walk is an older asset, it likely has more growth potential as its located in a more economically robust city.