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Home Media Link Perspectives Time to Revisit REITs as the Interest Rate Hike Cycle Approaches to an End
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Link CEO George Hongchoy discusses the opportunity of investing in REITs under current market condition. He believes that a stabilised interest rate and economic environment will support a recovery of REITs’ valuation. Following market volatility over recent years, more Mainland investors are seeking investment stability and tend to accept lower rate of return. In view of their prevailing trailing average yield, Hong Kong-listed REITs seem to provide additional good investment options for Mainland Chinese investors if the Stock Connect scheme extends to cover REITs.


Following its meeting on 13 December 2023, the Federal Reserve indicated potential interest rate cuts in 2024. The dovish turn in its stance has fuelled a rebound in the prices of multiple global asset classes, including real estate investment trusts (REITs) in Asia-Pacific (APAC) that have been under pressure over the past two years. With investors foreseeing an imminent end to the rate hike cycle, APAC REIT indices have rebounded from the trough in October 2023. Hong Kong’s Hang Seng REIT Index and Singapore’s iEdge APAC REIT Index rose 16% and 15% in the final two months of 2023 respectively, outperforming their respective markets.

The market consensus is that the international financial system has moved on from its contractionary stage over the past few years. While challenges still lie ahead for the global economy, active investors have already been reallocating their assets, illustrated by a comeback in the unit prices of REITs. For investors in A-shares and the Hong Kong stock market, the improvement of the interest rate environment and the stabilisation of economic development will support the valuation in China’s onshore and offshore markets.

Moderate Risk with Sustainable Return

REITs originated in the United States in the 1960s and landed in Asia in the 21st century. The Link Real Estate Investment Trust (Link REIT), listed in November 2005, was Hong Kong’s first REIT to go public. Meanwhile, Mainland China has also accelerated the development of the public REIT market since 2021. Trading REITs is as easy and flexible as trading stocks in that authorised REITs of Hong Kong and Mainland China must list their shares on their respective stock exchanges. For example, as Hong Kong’s only blue-chip REIT, Link is highly liquid in the market – something it has achieved by leveraging its position as a Hang Seng Index constituent and as the largest REIT by market capitalisation in APAC.

REITs earn rental income, interest, management fees and capital gains through investing in real estate assets like properties and engaging in post-investment asset management and operation. An individual REIT can either focus on investing in one type of real estate or managing a portfolio of diversified underlying assets. Taking Mainland China’s C-REITs as an example, each of the onshore infrastructure REITs currently specialise in managing a single type of asset. This is attributed to the early stage of development of the C-REIT market, as well as the background and experience of the asset owners. This will be complemented by the incremental expansion of the variety of C-REITs permitted under the Mainland listed REIT regime.

Hong Kong also offers an array of REIT choices for investors. These include SF REIT, which mainly focuses on logistics in Mainland China; Yuexiu REIT, which owns multiple offices and retail properties in Hong Kong and Mainland China; and Link, which is rooted in Hong Kong’s non-discretionary retail facilities and manages a diversified portfolio of commercial properties across APAC. Compared with C-REITs, Hong Kong’s H-REITs accentuate their unique advantage through varied underlying assets, diversified and internationalised risk portfolios, and relatively more sophisticated asset and fund management experience.

Another feature that helps REITs stand out from regular stocks is the combination of a moderate risk profile, a consistent dividend policy and sustainable yields. This also meets Mainland investors’ demand for prudent allocation of their assets. After recent market volatility, “seeking stability” has gradually become the prevailing sentiment in the market. According to a research report co-conducted by the China Academy of Financial Research at Shanghai Jiao Tong University on the investment and wealth management behaviours of Chinese households, the proportion of interviewees that expected an annualised return of 0% to 5% jumped from 37% in 2021 to 54% in 2023. On the contrary, the number who expected higher returns fell.

Statistics from Hong Kong Exchanges and Clearing (HKEX) show that, as of 17 January 2024, the trailing average yield of the 11 REITs listed in the city was approximately 9.07%, while the trailing market capitalisation-weighted average yield was 7.13%, much higher than those of low-risk, low-return assets such as cash and certain types of fixed-income vehicles. Globally, dividend payout rates of most REITs listed on mainstream markets are at least 90% of their distributable income to abide by regulations, while in Hong Kong, a few REITs regularly pay out all distributable income as dividends. According to another research report co-released by China Merchant Bank on the country’s private wealth management, around 40% of surveyed high-net-worth Chinese individuals planned to invest in REITs over the next two years.

Connectivity Brings New Opportunities

In 2023, both Mainland and Hong Kong regulators revealed their intention of including REITs in the Stock Connect scheme. According to HKEX, over the past nine years since the scheme was launched in November 2014, the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programmes have brought about RMB1.8 trillion and HK$2.9 trillion of net fund flows into A-shares and Hong Kong stocks respectively. Should REITs be included in the scheme, a broadened investor base and increasing liquidity and turnover would bring new development opportunities for REITs in both markets.

The improvement in macro fundamentals is supporting REITs’ valuation. The prospect of rate cuts by major global central banks in 2024 will lower REITs’ interest expenses. The turnaround in monetary policy may also fuel overall economic activities, benefiting REITs’ underlying assets.

International real estate investment service provider Colliers forecasts that the Hong Kong retail property market will see a stronger revival in the second half of 2024. Transactions in both primary and secondary markets in Australia in recent months have also shown signs that REITs’ valuation is recovering. Along with the recovery of Singaporean REITs, there are now plenty of factors to justify a positive outlook for APAC REIT markets, including Hong Kong’s. Valuation of REITs with diversified businesses in the region may also stabilise or appreciate.

With all that being said, investing in REITs is not risk free. Factors such as interest rate movement and real estate cycles can all affect the fundamentals of REITs. The professional acumen of asset and fund managers also plays a key role in determining the values of REITs’ underlying assets. While the market valuations of both Mainland and Hong Kong REITs are amid correction, the market is also improving structurally. REITs are therefore expected to play a more significant role in investors’ wealth management asset allocations in the long run.


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