25 October 2016
Chief Secretary Carrie Lam (right) considers The Link among three outsanding issues that need focus. Photo: HKEJ
Chief Secretary Carrie Lam (right) considers The Link among three outsanding issues that need focus. Photo: HKEJ

Leung’s criticism fails to slow Link REIT surge

Investors are increasingly wary of political risks amid integration between Hong Kong and mainland markets.

For example, Chief Executive Leung Chun-ying has taken on Link REIT (00823.HK).

But the share price of the real estate investment trust hit a new record on Tuesday. Link REIT has outperformed the Hang Seng Index by more than 40 basis points in the past 12 months.

It’s up 20 percent this year while the Hang Seng Index is down 3 percent.

In the past 12 months, Link REIT has gained 25.3 percent while the Hong Kong benchmark has fallen 14.8 percent.

That means if two investors entered the market at its peak last year, with one buying CSOP FTSE China A50 ETF (02822.HK) and the other getting Tracker Fund  (02800.HK), they would have lost 28.5 percent and 14.8 percent of their investment, respectively.

By contrast, a third investor who bought Link REIT would have made a whopping 25.3 percent profit.

Massive capital has flowed into real estate investment trusts amid heightened market volatility.

China’s A shares crashed last year while developed markets are mired in Brexit and uncertainty in the US over the pace of interest rate increases.

However, some long-only funds have minimum position requirement, so fund managers have to buy something.

REITs appear to be the safest choice in the short term.

That also reflects risk aversion in the market despite abundant liquidity.

Link REIT has outperformed 10 other real estate investment trusts listed in Hong Kong.

As one of Hong Kong’s biggest landlords, The Link owns and manages nearly all shopping centers in public housing estates and wet markets.

It is more resilient to economic cycles than high-end shopping malls, office buildings or luxury hotels.

However, the company has been criticized for maxing out rental income and for business practices that push up rents and drive small entrepreneurs out of business.

The government is under pressure to do something to change the situation. That’s the biggest uncertainty for investors.

Chief Secretary Carrie Lam reportedly is focused on three longstanding issues — The Link, MTR and offsetting of employers’ contribution from workers’ severance and long service payment under the Mandatory Provident Fund.

Leung Chun-ying challenged The Link to put people before profit in an interview with the South China Morning Post and said the government is looking into other alternatives.

Generally, the stock price of a company sways to criticism by senior government officials and policymakers but the price of Link REIT has instead risen in response to these remarks.

Leung’s administration is said to be considering building shopping malls and wet markets near Link properties to create competition.

However, everyone knows finding land is the toughest job in Hong Kong.

It’s difficult enough for the government to build adequate shopping malls to challenge The Link’s dominance, let alone control rent in an open market economy.

Increasing land supply is out of the question.

Politicians are simply making the gesture to win votes, which some investors might misinterpret as an actual goal or commitment.

This article appeared in the Hong Kong Economic Journal on July 13

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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