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Fortune REIT: Price plunged to HK$5.60 a unit.

Sunday, March 23, 2014

From a reader:

Hi AK, can I have your opinion on Fortune Reit at current price?
Sent from my iPad

My reply:

I was never interested in this REIT very much because it was listed in HK$.

I guess you are interested in Fortune REIT because its unit price plunged and closed at HK$5.60 a unit recently?

Looking at the numbers, an estimated annual DPU of 36c means a yield of 6.43%. This is in HK$ terms. What we get in S$ terms will depend on the exchange rate at your point of entry and also at the point when the distributions are made. Messy.

The REIT is trading at a significant discount to its NAV of HK$10.26 a unit. Gearing ratio at 32.7%. All this information, we can get from its presentation slides for year ended 31 Dec 2013.

Interest cover ratio has been declining.

We could see some form of equity fund raising soon since the REIT does not have a credit rating and could not exceed 35% in gearing.

Technically, unit price is resting on immediate support now and if that should break, the next support is at HK$5.30. The downtrend is pretty strong.

I won't say whether you should buy or sell this REIT now. You decide.

Click to enlarge.


David & Thi said...

I think HK is facing head wind.... the chinese has been selling their luxury apartment at below market price....

Most of the malls are selling high end branded stuff and as we witness the reduction in chinese spending, the mall may be in trouble...

Super Lee is quick to sell Watson and other HK assets but our Temasek is going in to buy???

Personally i am not very positive on Hong Kong market as they are now very much driven by hot money from China which is going back home....

Just my 2 cents view.

AK71 said...

Hi Yee,

I believe that things are looking toppish for Hong Kong and, also, Singapore. However, this is where I hope that my bowling ball will be more crystal ball like for once. LOL. ;p

SnOOpy168 said...

HK properties are not for the faint hearted, where certain group of buyers can show up with bag full of cash to pay and leverage is barely needed. My local friends there resigned to the fact that they are most likely nett renters or stay with parents until next available option.

Plus their land title lease is only 33 years (50 years after 1997). Would you buy had this kind of property are available in SG ?

AK71 said...

Hi SnOOpy168,

Yes, my friends there also say that the rental yields are so low that it really does not make much sense to buy the properties.

This is why Fortune REIT has to trade at such a big discount to the NAV in order to offer an attractive enough distribution yield. :)

SnOOpy168 said...

Just remembered that FR was one of my key REITs counter, when I started investing few years ago. Reason is that i had visited a few of the properties held, have good human traffic. therefore shops should have no prob being taken up.

Entry price was like S$3.30 or something and it shot past $4, when I let go @ $3.95. My 1st profit taking ever. Reason for letting go, the HKD is depreciating, from S$1 = HK$4.98 to today's HK$6+. Naturally, DPU & valuation will drop (i think, and is similar to LippoMall now).

Anyway, will I return to this counter ? Yes, but only if the yield is past 8-9%. Otherwise...... lets enjoy the mall's free air con in the hot summer day.

Rental yield in HK, traditionally is negative to about 2% max. Those earning higher, are likely to be holding the properties for the past decades, like my previous landlord. Why buy & rent when it is negative sum ? Just that there is some money coming in, while waiting for the price to rise.

Sure. My friend's atas mid level 2 BR apartment (prime area) took over 1 year to be sold.

redponza said...

I think I really should comment on this post as I am from HK and is staying in HK.

Disclaimer: Fortune REIT is one of the largest REIT in my portfolio and of course I got in at a much lower level that its current price.

-this counter is about shopping mall (much like Frasers Centrepoint), not premier shopping mall but rather shopping mall for daily necessities in residential area.

-the main shoppers will be the local residents rather than tourists, so there will be minimal upside/downside if China mainland tourists increase/decrease.

-hence the rental for residential area shopping malls are resilient

-the sponsor is the listed companies of Lee Ka Shing

-in the past, Fortune REIT has been dumped a no. of properties into it by its parent

-all buying of properties from parents are yield accretive except the one in 2009 which leads to dilution

-the properties in the parent's hands are mostly under-managed. This is due to the fact that Hutchison or Cheung Kong are more of a trader with buy and sell mindset than a property investor. Why care the management when you can reap a good profit in a market uprun?

-so the properties transferred from the parents to Fortune REIT usually have more potential for AEI, rental adjustment

-management has proven to be capable to improve the properties through AEI projects (especially after the joining of current deputy CEO CHIU YU)

-Chiu Yu is the daughter of CHIU KWOK HUNG and CHIU KWOK HUNG is one of Li Ka Shing's best men in property biz, hence Chiu Yu may want to prove herself here?

Current HK shopping property market situation
-yield for shops (街鋪) is only around 2-2.5% with increasing vacancy

-this is due to the aggressive asking rental by the landlord. These landlords would not cut rental too much in the fear of affecting the valuation of the 街鋪

-I would say there is a bubble in the price of 街鋪

-due to this fact, more and more chain retailers are moving to shopping malls as shopping malls' rental is much cheaper

-so this helps sustain/improve the rental of shopping malls as these chain retailers are used to the rental of 街鋪 and they have higher affordability

-that's why the current financial results of listed shopping malls are still quite strong and with improvement

Comment to the above post
-in HK, you have to pay land rent (a small amount) each year after the title expiry. For the flat I am currently in, I paid HKD2k each year to the government

-the rental yield is low based on valuation. But you are not buying the counter at its NAV? So the rental yield is much higher at these prices

-high end residential property is a different market than shopping malls, pls do not compare. And as explained above, the rental for shopping malls are actually helped by the current situation

-the supply of shopping space is low in the coming years as most of these will be from the base shopping arcade of new residential projects

-demand and local consumption should remain strong as we are eyeing a 3-5% salary increment for employees and historically low unemployment rate here

-Fortune REIT DPU has been growing at high single digit since listed

-based on that, I would consider 7% yield more attractive, so that means around HKD5.15. With the possible fluctuation in exchange rate for SG, you may add another 10% as margin of safety

-one downside risk is that its parent is dumping properties causing yield dilution

redponza said...

To add a sidenote:

-a significant portion of the shops inside Fortune REIT's malls are supermarkets, schools, banks etc which are consumer staples

AK71 said...

Hi redponza,

Thank you very much for your comment. I am sure all of us appreciate it very much. You have certainly given us a more complete picture of what is the reality in Hong Kong. :D

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