Link REIT: Hong Kong Retail Rental Pressure Remains, but Units Still Attractive

We maintain our HKD 45 fair value estimate for no-moat Link REIT following the trust's brief preblackout update. While Link’s Hong Kong retail portfolio tenant sales dipped 3.3% year on year for April-December 2024, this outperformed the 7.6% drop for overall Hong Kong retail sales during the same period. Occupancy remains robust at 97.1% as of December 2024, and tenant sales showed signs of stabilization, with the decline narrowing compared with the first half of fiscal 2025 (ending March), in line with our expectations. That said, management anticipates mild negative rental reversion for the Hong Kong retail portfolio in fiscal 2025-26 as the weakness in retail sales takes time to reflect in rental reversion numbers upon lease renewals. We expect this to be partly offset by positive rental reversion in the trust’s international assets. We have fine-tuned our rental growth and finance cost assumptions, leading to a 4% decline in our fiscal 2025 adjusted earnings forecast. However, our long-term estimates are largely unchanged. We continue to view Link’s units as undervalued, trading at a 16% discount to our valuation. Our fiscal 2025 distribution per unit forecast of HKD 2.57 implies a distribution yield of 6.8%.