Morningstar | No Change in Long-Term View, Champion REIT's Defensiveness Priced Into Current Unit Price. See Updated Analyst Note from 11 Dec 2018
Our view on Champion REIT is unchanged, and we continue to believe the trust’s two properties benefit from efficient scale and generate rental above market average with near full occupancy. While unit price has declined close to 6% off its peak, the relative defensiveness of the trust’s income has seen the trust outperform the wider Hang Seng Index. We continue to see this to remain as the case if equity market conditions deteriorate, though we believe the defensiveness is priced into the current unit price of HKD 4.60.As evident in the first-half results, the fundamentals of the trust’s properties remain strong with 3 Garden Road achieving rental of HKD 130 per square feet per month and stronger turnover rent at Langham Retail underpinned rising income at that property. With 40% of leases up expiring or up for review at 3 Garden Road in 2019 and 36% expiring in 2020, the sustainability of current market rental is vital for the trust over the next two years. Likewise for Langham retail, where 35% of leases are expiring in 2019 and 21% for each of the two years thereafter. Retail sales for the city as a whole for the first nine month of the year was up 11% and continued its recovery, which started March 2017. However, Typhoon Mankit had a negative impact in October as retail sales slowed to an increase of 2.4%. Year-to-date tourist arrivals remained strong, up 10% year on year, with mainland tourists up 13%. In the medium term, retail sales should remain resilient though weakening residential real estate prices in recent months, the first since early 2015, could weigh on retail sales as the wealth effect kicks in. By category, entertainment and food and beverage makes up 37% of rental for the property and the lifestyle aspect minimize downside relative to more discretionary spending in cosmetics, apparel, and durable goods.
For the office assets, demand remains strong though trade concerns may be a risk in the medium term. However, this is supported by a structurally supply shortage in Grade A office space in Central.
Champion Real Estate Investment Trust and its subsidiaries are engaged in owning and investing in income-producing commercial properties in Hong Kong with the objective of producing stable and sustainable distributions to unitholders and to achieve long term growth in the net asset value per unit.
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