Dialogue with Link: Unveiling the Secrets Behind Asia's Leading REIT

(This is the English translation of a Chinese advertorial ghostwritten for Link Asset Management. The original story is as follows: https://t.10jqka.com.cn/pid_400984636.shtml)

As the largest Real Estate Investment Trust (REIT) in Asia by asset value, Link REIT is highly favored by a wide spectrum of long-term institutional investors—including major international fund houses and pension funds—as well as a vast number of local Hong Kong retail investors. This sustained appeal stems from its professional, meticulous management and solid, sustainable returns.

Since its listing on the Main Board of the Hong Kong Stock Exchange in November 2005, Link REIT has been recognized as both the first REIT on the Hong Kong stock market and the largest in Asia.

Over the past 19 years, Link has successfully evolved from a pure-play Hong Kong retail property operator into a leading real estate investor and manager across the Asia Pacific region.

In the latest episode of "RoyalFlush Dialogue with Listing Company," we sit down with George Hongchoy, Group Chief Executive Officer of Link Asset Management Limited, to delve into Link REIT's operational features and performance, its professional and diversified development strategy, and uncover the secrets behind how Asia’s leading REIT was "forged."

I. Investment Opportunities in Hong Kong-Listed REITs

RoyalFlush: Link REIT is a flagship entity in the Asia Pacific REIT market. Could you start by introducing investors to the defining characteristics of a REIT as an asset class?

Hongchoy: REIT, or Real Estate Investment Trust, is categorized as an alternative investment. It generates returns—including rent, interest, management fees, and capital appreciation—by investing in, operating, and divesting real estate and related assets. This makes REITs uniquely suited for long-term value investors seeking stable, sustained returns, perfectly embodying the concept of "patient capital."

Under the Hong Kong Securities and Futures Ordinance, Hong Kong-domiciled REITs must list on the Stock Exchange and are mandated to distribute at least 90% of their distributable income as dividends to unitholders. This adherence to mature international standards boosts disclosure transparency, provides a liquid, convenient trading platform, and institutionally secures stable returns for investors.

Link REIT, the largest REIT in Asia, exemplifies this model. With a market capitalization of approximately HK$100 billion (over RMB 90 billion), it is a Hong Kong large-cap stock and a Hang Seng Index constituent. Being 100% publicly held with no single majority shareholder, we boast exceptional trading liquidity. As a key underlying asset for many mutual funds and ETFs, we enjoy strong, long-term backing from both international institutional investors and Hong Kong retail investors. Trading Link’s trust units on the Main Board of the Hong Kong Stock Exchange is as convenient and seamless as trading any conventional Hong Kong stock.

Exceeding regulatory requirements, Link REIT distributes 100% of its distributable income as annual dividends. Since its 2005 listing, the total distributable income has consistently climbed year-on-year. Notably, between FY2011/2012 and FY2022/2023, the total distributable income surged by 112%, achieving a Compound Annual Growth Rate (CAGR) of 7.1%. This significantly surpasses the 1% to 3% annual dividend CAGR growth posted by peers, including property developers, REITs, and retail operators in Hong Kong, Singapore, and Australia.

Link REIT is a Hang Seng Index constituent, 100% publicly held with no single majority shareholder. (Pictured: Link's head office at The Quayside, Kowloon, Hong Kong.)

RoyalFlush: Regulators in Mainland China and Hong Kong have announced the expansion of the Stock Connect scheme to integrate REITs. What is your take on this, and what opportunities will this arrangement unlock for investors and the Hong Kong REIT market?

Hongchoy: Link applauds the regulators' decision to integrate REITs into the Stock Connect scheme. For both domestic and international investors, this move will widen the investor base in both markets, drawing in substantial capital. Given the robust Mainland demand for long-term, stable, and diversified asset allocation, we believe this inclusion will be a powerful catalyst for the Hong Kong REIT market's continued growth, development, and maturity.

It is crucial to note that the Stock Connect regime is marking its tenth year, during which the scale of its funds and investment targets has grown progressively, from a modest trickle to a significant flow. Based on this established track record, we see the forthcoming "REIT Connect" as a long-term mechanism, not a "one-off transaction." Facilitating stable, progressive growth for the Hong Kong REIT market via this inclusion is undoubtedly the healthiest and most desirable trajectory.

RoyalFlush: Using Hong Kong-listed REITs as an example, could you outline the critical factors investors should prioritize when selecting a REIT?

Hongchoy: When assessing REITs for investment, investors must comprehensively evaluate their long-term value and growth trajectory. This requires considering a range of factors: the management team's professional competence and historical performance, operational metrics like rental income and occupancy rates, revenue growth potential, the quality and diversification of the underlying assets, and financial health indicators such as the debt ratio.

The value proposition of Hong Kong REITs is underpinned by their capacity for stable dividends and capital appreciation. Furthermore, their appeal lies in their diverse underlying assets, decentralized risk exposure, internationalized portfolios, and the managers' relatively sophisticated expertise in asset and fund management. Adding to this, the Hong Kong SAR government recently announced an exemption of stamp duty on REIT transactions to bolster market development, a measure set to lower trading costs and significantly enhance liquidity for Hong Kong-listed REITs.

II. New Positioning as a "REIT Plus"

RoyalFlush: Could you briefly introduce the relationship between Link Real Estate Investment Trust and Link Asset Management Limited?

Hongchoy: Link Asset Management Limited serves as both the Fund Manager and Asset Manager for Link Real Estate Investment Trust. Every listed trust unit purchased by an investor comprises two entitlements: the first is the management expertise of Link Asset Management Limited as the Manager, and the second is Link’s property investment portfolio.

As a leading, independent real estate investment management platform, Link Asset Management Limited possesses comprehensive capabilities covering fund, asset, and property management, a highly professional team, and a market-proven track record. This allows us to provide high-quality investment management services not only for our own portfolio but also for other capital partners. Link's property investment portfolio centers on necessity-based retail, continually expanding and optimizing across the Asia Pacific market. It achieves resilient performance through operational excellence and prudent capital management. The two entitlements purchased by investors include not only the rights related to real estate investment but also the management strength and long-term impetus that Link, as a professional manager, adds to the trust's returns.

RoyalFlush: Could you further introduce Link's main business and development vision?

Hongchoy: Headquartered in Hong Kong, Link's core business revolves around necessity-based community shopping centers and their associated car parks. Our operations are closely linked to the lives of Hong Kong citizens, as we are dedicated to meeting their daily needs. Through years of experience, Link has amassed extensive expertise in asset operation and REIT management. We have not only consistently optimized our core asset portfolio in Hong Kong but also successfully executed a diversification strategy in recent years, expanding our footprint across Mainland China, Singapore, Australia, and the UK, and broadening our investment scope from local community malls to logistics warehouses and offices.

Amidst the backdrop of global economic slowdown and rapidly changing macro environments, Link's diversification strategy has proven effective. Our core Hong Kong assets continue to provide a stable foundation, while geographical and asset class diversification offers additional growth drivers for our performance. Given the significant shifts in the global financial and real estate markets, which remain short-term challenges and uncertainties, Link recently unveiled its "REIT Plus" development positioning.

This "Plus" signifies that Link is more than a traditional REIT; it offers investors expanded opportunities and potential. On one hand, we will continue to actively manage our portfolio and deepen our diversification strategy. On the other hand, as a leading, experienced, and integrated investment management platform in the Asia Pacific, Link will enhance its investment management capabilities, build a more competitive talent team, and explore new income streams to continuously boost returns. This will be achieved through co-investments with third-party capital partners and by acting as a third-party manager for property owners. Moving forward, we remain committed to generating sustained, stable, and resilient returns for our unitholders across different economic cycles, ensuring long-term growth.

(Pictured: Link signing a 10-year asset and property management services agreement with real estate investment company Mercatus in 2023 for the retail mall AMK Hub in suburban Singapore.)

III. Proactive and Dynamic Asset Management

RoyalFlush: Having discussed the development strategy, could you elaborate on Link’s mature and professional operational model, specifically the three pillars of Asset Management, Portfolio Management, and Capital Management? Using Hong Kong and Mainland China as examples, how does the company leverage asset management to boost performance?

Hongchoy: Link has always practiced proactive asset management, optimizing the commercial layout and architectural structure of existing assets through "revitalization of stock." This process, which we call "Asset Enhancement Initiatives (AEI)," is designed to significantly improve a property's productivity, efficiency, and amenity, thereby unlocking its full potential and increasing asset value. Since our IPO in 2005, Link has completed 102 AEI projects in Hong Kong. Calculated from the FY2007/2008, approximately 90% of these projects have delivered double-digit returns on investment (ROI).

In contrast to our Hong Kong assets, which are positioned closer to grassroots community needs, Link's retail properties in Mainland China target middle-class consumers. Taking two assets in the Guangdong-Hong Kong-Macao Greater Bay Area as examples—Link Plaza Tianhe in Guangzhou and Link CentralWalk in Shenzhen—both faced significant vacancies after previous anchor tenants, such as old department stores and large supermarkets, vacated due to business issues and strategic changes. After acquiring these properties, Link undertook large-scale refurbishment of the spaces based on detailed market research and meticulous planning.

In 2023, we completed the Phase 1 Asset Enhancement of Link Plaza Tianhe, introducing over 60 new brands, with city- or regional-first stores accounting for over 50%. The overall occupancy rate also surged from an initial 70% to over 95%, yielding an ROI of approximately 12%.

Link CentralWalk, situated in Shenzhen’s Futian Central Business District, underwent its first refurbishment following Link's acquisition in 2022. We reconfigured the tenant mix, increasing the total number of shops by 20%. The positioning targets young consumers, local office workers, and families, while embracing the "Urban Oasis" green design concept. In July 2024, Link CentralWalk completed a new round of AEI for its basement level, introducing new specialty retail and trendy F&B brands. This new offering has been highly popular with both local Shenzhen consumers and those from nearby Hong Kong, resulting in a significant boost to both tenant and mall operational efficiency. The ROI from this basement level revitalization alone reached an exceptional 43.8%.

It is important to note that asset enhancement is a dynamic and long-term process. Beyond these large-scale renovation projects, proactive and dynamic management and maintenance of daily property operations—continually meeting the needs of consumers and tenants and improving their experience—are also crucial elements for earning customer and market trust and enhancing asset value.

Located in Shenzhen's Futian central business district, Link CentralWalk is atop the Futian Station of the Guangzhou-Shenzhen-Hong Kong Express Rail Link. The property implements the design concept of "Urban Paradise," with over 18,000 square meters of green space, offering a wide range of consumer and leisure choices, including dining, shopping, entertainment, and education.

IV. Diversification for New Growth

RoyalFlush: Link's asset distribution has evolved from an initial focus on Hong Kong to now center on the Asia Pacific, covering multiple markets. Could you outline the company's property portfolio management strategy?

Hongchoy: Through strategic investment and proactive, agile property portfolio management, Link has not only built a diversified property portfolio, but, more importantly, one that possesses resilience. This resilience allows us to navigate peaks and troughs, adapt to different economic cycles, and confidently face market changes.

Currently, Link owns 130 properties in Hong Kong, primarily consisting of retail malls, affiliated modern fresh markets, car parks, and a small number of office properties, mainly a Grade A office building used for both self-occupancy and leasing. Our diversification strategy began in 2015 with our entry into the Mainland China market. We now hold six retail properties and one office building across four tier-one cities—Beijing, Shanghai, Guangzhou, and Shenzhen—and possess five logistics warehouses in the Yangtze River Delta and Pearl River Delta regions.

Furthermore, Link owns two prime community retail properties in Singapore, which have consistently contributed robust growth to our performance in recent years. We also act as a third-party manager, assisting the local government in Singapore with the management of another community mall. In Australia, we hold stakes in six office projects and three retail properties across Sydney and Melbourne. In London, UK, we own a premium office building in Canary Wharf, leased to Morgan Stanley, a globally renowned investment bank, as its UK headquarters. These high-grade office buildings are strategically located in core business districts, offering convenient transport links, strong footfall, and stable demand.

RoyalFlush: How will Link continue to deepen its diversification strategy going forward?

Hongchoy: The diversification strategy is vital for Link to continuously build a resilient investment portfolio and generate new growth. Since our first diversification acquisition in Mainland China in 2015, the annualized growth rate of our distribution per unit has exceeded 4% over the nine years leading up to the FY2023/2024. Furthermore, part of the growth achieved in the past year is attributed to the Singapore assets acquired in 2023. The benefits of diversification are clear.

Link will continue to leverage its robust balance sheet to invest in more stable core assets. Meanwhile, collaborating with third-party capital will provide greater flexibility and opportunity for Link to acquire higher-returning value-added assets. For Link, a potential investment opportunity must be attractive across four key areas: pricing, financing costs, yield growth, and strategic positioning.

We will maintain our focus on Asia. Hong Kong will remain the foundation of our business, currently accounting for about 75% of our overall portfolio Assets Under Management (AUM), though this proportion is expected to gradually and moderately decrease in the medium to long term as diversification deepens. We will continue to review potential opportunities in Mainland China, aiming to keep the AUM weighting around the mid-teens (10% to 20%). Opportunities in Singapore and Australia will be assessed selectively, and Japan is also under consideration, albeit at a very early stage. While necessity-based retail commercial properties and logistics real estate are Link's preferred sectors, we remain open to exploring other new areas.

It is important to emphasize that Link currently has no predetermined transaction timetable. However, we closely monitor the market and actively seek investment opportunities that offer above-average risk-adjusted returns resulting from value mismatches or undervaluation. We will remain prudent, acting only when a highly attractive opportunity that is the right fit for Link arises.

Link REIT has adhered to a diversification strategy in recent years, investing across multiple Asia Pacific markets and asset classes to build a resilient investment portfolio. (Pictured: Queen Victoria Building, a large-scale fashion and cultural shopping center co-owned by Link in Sydney's CBD, Australia. This 19th-century historic building is also the city's second most-visited tourist attraction after the Sydney Opera House.)

V. Forward-Looking and Prudent Development

RoyalFlush: You mentioned leveraging the balance sheet; besides acquiring assets, does Link have plans for asset disposals?

Hongchoy: As a proactive, forward-looking professional asset manager, asset disposal is a crucial part of the entire asset operation cycle. We will dispose of assets nearing the end of their life cycle within Link's management system at the appropriate time. These options include full divestment or selling equity while retaining management and income rights. We will seek like-minded counterparties to identify win-win solutions. Funds generated from disposals will further strengthen our balance sheet and will be recycled into new investment opportunities or asset enhancement projects. However, we currently do not have a specific timetable for asset disposals.

RoyalFlush: The US Federal Reserve has started cutting interest rates. What is Link's expectation for the future interest rate trend, and how will it affect the company?

Hongchoy: Generally, interest rate cuts help reduce corporate financing costs, benefiting the REIT sector, especially those with higher leverage. The Fed's rate cut marks the official end of the highly tightened monetary environment that has persisted since the global pandemic, but the future direction of rates remains uncertain. We do not anticipate the Fed implementing drastic cuts in the short term, nor is the ultra-low rate environment seen after the 2008 Global Financial Crisis likely to quickly reappear. Ultimately, interest rates will gradually return to a normal level.

Link REIT currently maintains a healthy, low net gearing ratio of only 20.6%, complemented by favorable ratings of A2, A, and A from Moody's, S&P, and Fitch, respectively, all with a "stable" outlook. This stability is primarily attributable to prudent capital management—one of Link's three management pillars—in addition to proactive asset management and diversified portfolio oversight. Currently, 66.4% of the company's liabilities are fixed-rate debt, an arrangement made previously to counter the high-interest-rate environment. This proportion has decreased from 69.8% reported in our FY2023/2024 full-year results six months ago, demonstrating Link's agility in adjusting the balance sheet to the changing interest rate environment. Furthermore, the company’s average total borrowing cost remains low at 3.69% as of the first half of the 2024/2025 financial year. Crucially, all non-Hong Kong asset earnings are fully hedged against foreign currency fluctuations to mitigate their impact on the company’s distributable income.

RoyalFlush: Link REIT's latest interim results for FY2024/2025 remain robust. Could you elaborate on how you managed to achieve such growth amidst the current economic climate?

Hongchoy: As of September 30, 2024, Link achieved year-on-year growth of 6.4% in revenue and 5.8% in Net Property Income during the first half of FY2024/2025. Despite weak market sentiment and slowing demand, our performance once again demonstrated resilient fortitude, with the diversification strategy continuing to yield results and contributing solid growth. Total distributable income increased by 4.3% year-on-year, and distribution per unit rose by 3.7% year-on-year to HK134.89 cents.

Hong Kong's economy is still in a slow post-pandemic recovery phase, and the retail sector continues to face significant challenges. However, Link's core necessity-based retail business has been less affected compared to discretionary retail, luxury goods, and travel-related segments. In the first half of this financial year, revenue from Link’s Hong Kong property portfolio grew by 2.2% year-on-year, Net Property Income increased by 2.4% year-on-year, and the occupancy rate in the Hong Kong retail business remained high at 97.8%.

Located in the busy Wong Tai Sin district of Kowloon, Hong Kong, Temple Mall South is surrounded by public housing estates and connects to public transportation networks such as the MTR and buses, making it one of the go-to choices for daily consumption and leisure for the residents in the district.

Our leasing team deserves great credit for these achievements. During the first half of the financial year, Link’s Hong Kong community malls signed over 300 new leases. The tenants’ rent-to-sales ratio was maintained at a stable and healthy 13.1%, reflecting our active asset operation and rent management, which allows Link to share success with high-performing tenants while providing timely support to those facing difficulties. Our "people-centric" management strategy aims to ensure tenants grow alongside us, achieving sustainable development.

In Mainland China, despite certain structural challenges, Link recorded year-on-year growth of 39.2% in gross revenue and 37.6% in Net Property Income in the first half of the financial year. This growth was driven by improved retail asset performance, particularly the successful basement level refurbishment of Link CentralWalk, which was well-received by consumers, and the new contribution from Link’s acquisition of the remaining 50% stake in Link Plaza Qibao in February 2024.

In Singapore, shopping mall foot traffic has recovered to pre-pandemic levels. Our two suburban retail properties acquired in 2023—Jurong Point and Swing By @ Thomson Plaza—show stable demand and robust performance, boasting a 99.8% occupancy rate and a rental reversion rate of 18.9%. In Australia, our retail asset portfolio sales have surpassed pre-pandemic levels, maintaining a high occupancy rate of 99.1% and stable rents. We will continue to focus on optimizing the tenant mix by introducing new and unique brands to offer fresh choices to our customers.