EUR 850.00 For Business Accounts Only

Morningstar | First-Half Rental Growth Expected to be Resilient for Champion REIT

Our fair value estimate of HKD 5 is reaffirmed for Champion REIT as key underlying fundamentals for the narrow-moat trust are unchanged. We expect strong rental growth for offices for 3 Garden Road and Langham Place though retail sales will likely be weaker against a strong 2018. The latter should see the variable sales of the rental component, which made up 23% of the property’s retail rental last year, softening. Year to date retail environment is generally weak in Hong Kong. Despite an increase in visitors from Mainland China, retail sales in May were again weaker as consumers remained cautious. The former will likely slow in coming months as further protests may deter Mainland visitors, pressuring retail sales. Foot traffic was busy at the time of our visit to Langham Place yesterday, a Sunday afternoon. While this appears to be comparatively weaker than last year, we do note a planned protest was occurring nearby, which may have deterred potential shoppers. There does not appear to a change in anchor tenants at the busier, lower levels.

More importantly for the trust, the Grade A office market is still resilient. Rental in Central is still supported by low vacancy rates and demand from corporates. According to JLL, vacancy rates for Grade A offices in Central at the end of May was tight at 2.3% and we expect this to underpin rental growth for 3 Garden Road. With close to 30% of rental expiring or up for renewal this year, we expect strong rental renewal as average passing rental at the end of 2018 was below HKD 100 per square feet per month, compared with achieved market rental of HKD 140. We have factored this in for fiscal 2019 and 2020, resulting in total revenue growth of 7% annually. With the U.S. interest rates at least remaining steady, dividend related stocks have rallied strongly in the first half of 2019. We believe the trust is overvalued and our 2-star rating is reaffirmed. On current unit price, the trust is trading on a 4.7% dividend yield.