Link REIT (823.HK) has sold its assets again and this time it has sold 17 malls for HK$23 billion, making a total profit of HK$7.4 billion. The assets were collectively sold for a 52 percent premium to their total appraised value as at 30 September 2017.

Usually, the valuation of a property is derived from its rental value. At a 52 percent premium, the buyer must be expecting that rent could be raised by the same quantum in the future. Therefore, it is bad news to existing tenants each time Link REIT sells its assets.

 Why does Link REIT keep selling its assets?

Behind the REIT’s motivation to sell its assets is that politicians constantly protested against the REIT for raising its rents, as Link REIT’s portfolio comprised of malls located in public housing estates.

As part of its strategy, Link REIT sold its malls and bought other commercial properties in private residential areas.  In doing so, Link REIT is transforming itself to become like any other real estate investment trust, or even a developer itself, as it expands into China.

Due to political reasons, the rents that Link REIT collects are below the market rates. Therefore, buyers are willing to offer a bid price that is higher than the book value for Link REIT’s assets. After accounting for the gains on disposal of properties, the REIT records lofty profits that also boost its dividends as well as its share price every year. As a result, Link REIT’s shares posted the strongest performance amongst all the Hong Kong-listed REITs, making it the best REIT counter to invest in the long term.

Expensive, but certainly a good buy.

Prospective investors in Link REIT must be prepared to be vested for the long haul as the share price could see major corrections whenever it rises substantially.  Sometimes, the correction could be as much as 20 percent. In such circumstances, do not sell to cut loss. Instead, keep those shares for dividends and patiently wait for the share price to recover. Proving my point, Link REIT always rose to a new record high after every correction.

However, as compared to other REITs, Link REIT offers the lowest dividend yield as its share price increases at a faster pace. Despite higher valuation and low yield, investors are still willing to buying Link REIT, in hopes that their yield-to-cost would catch up with that of other REITs in years to come.

Therefore, one – with the intent to collect dividends – would require patience when buying into Link REIT. Retirees, who immediately expect high yields, may not find Link REIT attractive at onset. One way to manage this is to split the money, with some buying into high yield counters, and some buying into this good REIT.