Link REIT and Fortune REIT – Main beneficiaries of Hong Kong Reits’ inclusion into the Southbound Stock Connect

Introduction to Southbound Stock Connect

The Southbound Stock Connect program is a pivotal component of the mutual market access framework established between the Hong Kong Stock Exchange (HKSE) and mainland Chinese exchanges, specifically the Shanghai and Shenzhen Stock Exchanges. Initiated on November 17, 2014, as part of the Shanghai-Hong Kong Stock Connect, and later expanded with the Shenzhen-Hong Kong Stock Connect, it allows qualified mainland Chinese investors to trade eligible HKSE-listed securities through their local brokers. This program facilitates cross-border investment, enhancing capital flow and market integration between mainland China and Hong Kong (HKEX Stock Connect).

The program operates under daily quotas. For Northbound/Southbound trading, the daily quotas are RMB 52 billion and RMB 42 billion respectively for each of the Shanghai Connect and Shenzhen Connect, ensuring controlled yet significant investment flows. It has transformed Hong Kong’s financial markets by broadening the investor base and increasing liquidity.

Expected Inclusion of REITs in Southbound Stock Connect

Timeline and Developments

In April 2024, the China Securities Regulatory Commission (CSRC) announced five key initiatives to deepen capital market integration, one of which was the inclusion of Hong Kong-listed Real Estate Investment Trusts (REITs) in the Stock Connect program. This move, often referred to as ‘REIT Connect,’ aims to include both Hong Kong REITs and mainland China’s infrastructure securities investment funds. The CSRC is collaborating with the Hong Kong Securities and Futures Commission (SFC) and relevant exchanges to implement these policies as soon as possible.

As of April 15, 2025, no specific implementation date has been confirmed. However, the announcement in April 2024 and subsequent discussions suggest that inclusion is imminent, likely within 2025. The Hong Kong REIT Association (HKREITA) has welcomed this development, noting it as a policy recommendation to promote REIT industry growth.

HSBC Research has recently published its opinion that the possibility of the inclusion of Hong Kong Reits into the Stock Connect program within this year is high. They have a buy recommendation on Link Reit and Fortune Reit with target price of 41.60 HK$ and 5 HK$ respectively.

Eligibility Criteria

The eligibility criteria for REITs inclusion remain under discussion. Current Stock Connect criteria for stocks would qualify only two Hong Kong REITs, whereas ETF criteria (HKD 550 million AUM) would include all. A tailored set of criteria is expected, balancing inclusivity and market stability.

Potential Impact of REIT Inclusion

Increased Demand and Valuations

The inclusion of REITs in the Southbound Stock Connect is poised to significantly impact Hong Kong’s REIT market. Mainland Chinese investors, known for seeking high-yield investments amid limited domestic options, are likely to find Hong Kong REITs attractive due to their requirement to distribute at least 90% of taxable income as dividends. This demand is expected to drive up REIT share prices, leading to higher valuations.

Enhanced Liquidity and Market Growth

The influx of mainland capital is anticipated to enhance trading liquidity, making Hong Kong’s REIT market more dynamic. Analysts suggest this could attract more international issuers to list REITs in Hong Kong, fostering a virtuous cycle of growth and reinforcing Hong Kong’s position as an international financial center.

Mainland Investors’ Yield-Seeking Behavior

Mainland investors’ preference for stable, high-yield investments aligns well with REITs’ characteristics. With Hong Kong REITs offering yields often exceeding those of other asset classes, the inclusion is likely to channel significant capital into these securities, further amplifying valuation increases.

Comparison of Link REIT and Fortune REIT

Link REIT and Fortune REIT are two prominent Hong Kong-listed REITs expected to benefit from the Southbound Stock Connect inclusion. Below is a detailed comparison across the different dimensions.

History and Background

• Link REIT: Launched to privatize 151 retail facilities and 79,000 parking spaces from the Hong Kong Housing Authority, it has grown to become Asia’s largest REIT by market capitalization.
• Fortune REIT: First listed on the Singapore Exchange in 2003, it later dual-listed in Hong Kong (2010). The initial IPO proceeds were used for the acquisition of the initial portfolio of 5 assets from its sponsor – Cheung Kong (Holdings) Limited.

Business Model and Property Portfolio

• Link REIT: Operates a diversified portfolio, including retail facilities, car parks, offices, and logistics assets across multiple regions. Its international expansion began in 2014, with acquisitions in China, Australia, Singapore, and the UK. Link Reit currently holds 130 properties in Hong Kong (Retail, Car parks and Office), 12 properties in Mainland China (Retail, Office and Logistics), and a combined total of 12 properties in Australia, Singapore and the UK (Retail and Office).
• Fortune REIT: Focuses on 16 retail properties, primarily serving daily necessity needs in Hong Kong’s densely populated residential areas, with one mall in Singapore. Its portfolio includes malls like Fortune City One and Ma On Shan Plaza.

Management Model

Both REITs employ different asset management models:

• Link REIT: Link Reit is the only internally managed REIT in Asia.
• Fortune REIT: Managed by ESR Asset Management (Fortune) Limited, part of the ESR Group, handling asset management and strategic growth.

Advantages of Link REIT’s Internal Asset Management Model:

Lower Cost Structure: Link REIT’s internal management leads to a more cost-effective operation compared to externally managed REITs. This efficiency is attributed to the absence of external management fees and the streamlined decision-making processes within the organization.​

Stronger Corporate Governance: The internal model fosters robust governance structures, reducing potential conflicts of interest. With management being part of the organization, there’s a unified approach to decision-making that aligns with the REIT’s objectives.​

Focused Portfolio Management: Managing a single portfolio internally allows for dedicated attention to asset performance and strategic growth, enhancing overall efficiency and effectiveness.​

Alignment of Manager and Shareholder Interests:

In an internal management model, the REIT’s management team is directly employed by the trust, ensuring their incentives are closely tied to the REIT’s performance. This structure promotes decisions that are in the best interest of shareholders, as management’s success is directly linked to the REIT’s success. In contrast, external managers may prioritize fee generation and asset growth, which might not always align with shareholder value.​

Link REIT’s approach exemplifies how internal management can lead to better alignment between management and shareholders, fostering sustainable growth and value creation.

Link REIT’s Link 3.0 Strategy and Asset-Light Advantage

Link REIT’s Link 3.0 strategy, introduced to deliver resilient and diversified earnings, emphasizes active portfolio management and expansion through partnerships. Key elements include:

• Diversification: Expanding into new asset classes (e.g., logistics, offices) and regions (e.g., Australia, Singapore, UK).
• Asset-Light Approach: Utilizing joint ventures and minority shareholdings to manage more assets without full ownership, reducing capital intensity (Link REIT News Release).

This strategy provides Link REIT with a distinct advantage over Fortune REIT by:

• Scalability: Managing larger portfolios with less capital, enhancing return on equity.
• Flexibility: Adapting to market opportunities across diverse regions and asset types.
• Resilience: Diversifying income streams, reducing reliance on Hong Kong’s retail market.

Fortune REIT, conversely, focuses on optimizing its existing retail portfolio through asset enhancements and active leasing, which, while effective, limits its growth scope compared to Link REIT’s broader strategy (Fortune REIT Corporate Profile).

Fundamental Valuation

Note: Market cap data based on closing prices on 17 April 2025.

• Market Cap: Link REIT’s significantly larger market cap reflects its scale and diversified portfolio. Fortune REIT’s smaller size aligns with its focused retail strategy.
• Dividend Yield: Fortune REIT offers a higher yield, appealing to income-focused investors, while Link REIT’s lower yield is balanced by the appeal of faster potential growth.
• Gross Gearing Ratio: Link REIT maintains a low gearing ratio, indicating financial prudence. While Fortune REIT has a higher gearing ratio compared to Link REIT, it is still well within the regulatory limit of not more than 50%.
• Dividend Track Record: Both REITs have a good history of consistent dividend payouts since their listing.

Future Growth Plans

• Link REIT: Under Link 3.0, it aims to continue diversifying into new markets and asset classes, leveraging joint ventures and capital partnerships to enhance fee income and portfolio resilience. Towards this end, in February 2025, Link Reit launched Link Real Estate Partners, a new business line which aims to leverage on its real estate experience and to manage third party capital.
• Fortune REIT: Focuses on active property management, asset enhancements, and maintaining high occupancy to boost yields and net property income. Its strategy is less expansive, concentrating on its core Hong Kong retail market with limited international exposure.

Conclusion

The inclusion of REITs in the Southbound Stock Connect program is set to transform Hong Kong’s REIT market by attracting mainland Chinese investors, increasing valuations, and enhancing liquidity. Link REIT and Fortune REIT, as likely candidates, offer distinct investment profiles. Link REIT’s diversified portfolio and asset-light strategy under Link 3.0 position it for robust growth and resilience, while Fortune REIT’s higher dividend yield and focused retail strategy appeal to income-seeking investors. Both are well-poised to benefit from the anticipated capital inflows, with Link REIT potentially offering greater long-term growth potential due to its broader market and asset exposure.

Disclaimer:

This article is a record of the thinking behind a personal investment decision. It does not represent any recommendation to purchase any stock mentioned in the article. As always, readers are strongly advised to do their own due diligence before making any investment decisions.