EUR 850.00 For Business Accounts Only

Morningstar | Higher Turnover Rent Lifts Champion REIT's Solid Second-Half Result. See Updated Analyst Note from 21 Feb 2019

Stronger-than-expected turnover rent at Langham Mall and higher rental revision at 3 Garden Road underpinned Champion REIT’s solid second-half result. Distribution of HKD 0.2617 was largely in line with our forecast. The result does not alter our view on the trust. Our fair value estimate is increased slightly to HKD 4.80 from HKD 4.60. While the performance was better than expected and we continue to see the two properties as high quality, we believe the upside is priced into the current unit price, which is at a 27% premium to our fair value. With the U.S. Federal reserve likely to pause in raising interest rates, high yielding sectors in REITs and utilities have repriced early in 2019. Our fiscal 2019 distribution forecast represents a yield of 5.1% at the current unit price, and we believe the market sees this as attractive at the still, low interest rate environment.

We expect trends at both properties to be sustained in 2019, though, turnover rents for the retail component of Langham may be pressured. Retail sales in Hong Kong is likely to moderate as uncertainty over trade will lower consumer confidence. Weaker residential real estate prices may also see reduced spending from domestic consumers. For the office component at Langham, we expect the occupancy level to be resilient as nearly 60% of the tenant mix is healthcare and medical, and beauty related. Our assumption factored in current market rental rate of HKD 50 per square feet, which is above passing rent of HKD 42.68.

We assume office rentals at 3 Garden Road to remain at current levels as there is no new Grade A office supply in Central in the medium term. The redevelopment of Hutchison House has also reduced office space available. With 3 Garden Road achieving rents of HKD 140 per square feet per month compared with passing rent of HKD 98.61, we expect rising average rental at the property for the next two years. We assume office rental to moderate thereafter.