Link REIT (SEHK: 823) has faced several headwinds over the past few years such as the Hong Kong anti-government protests and Covid-19. Although the protests and Covid-19 hurt Link REIT now, they will eventually end.
One headwind that might persist for the long term for Link REIT is digitalisation. In the future, increasing digitalisation will affect Link REIT’s cash flows and thus its dividends. Currently, Link REIT has a very attractive dividend yield of 4.49%.
Since October of 2007, Link REIT’s dividend has consistently increased because execution has been strong and footfall at its malls has been extremely strong.
Due to the increasing headwind of digitalisation in the future, Link REIT may have to adjust to potentially preserve its history of dividend increases.
Here’s how digitalisation affects Link REIT and how it can turn the headwind into a potential tailwind.
How digitalisation affects Link REIT
For 2019, Link REIT reported the following exposures in its portfolio. As of 31 March 2020, 74.6% of Link REIT’s portfolio was in retail, 16.2% was in cark parks, and 9.2% was in office spaces.
For retail space, digitalisation services such as food delivery and being able to order very quickly from websites such as Tmall could decrease demand for mall products.
For car parking spaces, digitalisation and autonomous driving could increase vehicle utilisation. Rather than sitting idle most of the time in car parking lots, the vehicles of the future will be on the road more due to increased sharing. As a result, demand for car parking spaces might not be as strong.
For office space, digitalisation could cause people to work from home more and weaken demand. As Link REIT mentions in its annual results presentation for 2019/2020, video conferencing company Zoom has over 300 million daily meeting participants and Microsoft has over 75 million daily Team users.
Although those numbers will likely decrease after the Covid-19 outbreak is successfully contained globally, some of those workers could work at home more even after the outbreak. Given these factors, increasing digitalisation could be an increasing headwind for Link REIT.
How Link REIT could benefit from digitalisation
Fortunately, Link REIT can turn the headwind of digitalisation into a tailwind by becoming more of a data centre REIT.
Because Asia’s cloud market is less mature than the West’s, there is still plenty of time for Link REIT to enter and capture a lot of the growth.
Although it will be new to the sector, Link REIT has some advantages. Because Link REIT has a lower cost of capital than many competitors, it’s easier for it to make a profit given the same scale.
Given the massive growth expected in the sector, raising additional capital from investors would not be difficult.
Link REIT has a strong balance sheet, interest rates are low, and the company could enter into the data centre market in mainland China through an investment or through organic efforts.
It could boost expectations and maybe even its stock price if done smartly.
Digitalisation will be a big trend in the coming decade that could materially affect many of Link REIT’s operations.
Although the company could still do well even with the digitalisation headwind, Link REIT can turn the headwind into a tailwind by investing smartly in the data centre sector of real estate.