• Retail rebounds in Nov
• Active AEI programme
• Maintain BUY
Strong tourist arrivals boost retail
HK retail sales by volume grew by 8.1% YoY in Nov 2012, representing a rebound from the 3.6% YoY growth in Oct 2012. For 11M12, retail sales by volume grew by a solid 7.1% YoY. Tourist arrivals were a contributing factor, growing by 18.7% YoY in Nov (vs. +15.8% YoY for 10M12). 11M12 tourist arrivals totaled a whopping 44m. As we have previously calculated, tourists account for one quarter of overall HK retail sales (in terms of value), with mainland Chinese tourists accounting for one fifth of overall retail sales. The long term growth of the Chinese economy bodes well for HK retail properties.
Healthy rental growth to continue
Portfolio passing rent for FRT’s original portfolio (excluding the two properties purchased in Feb 2012) was up by 8.4% YoY for 9M12. We believe that for 2013, the increase in the passing rent will also be in the healthy high single digit percentages, particularly because of the recent completion of the HK$100m AEI at Fortune City One, its largest asset, with target ROI of 15%. A change in tenant mix will help improve the positioning of the mall and we believe rental reversions for this mall will be around the highteens. We like management’s proactive approach. Belvedere Square, which was one of the properties acquired in Feb 2012, has had 35% of its leases already re-negotiated in 9M12 and management has indicated that an AEI is possible for 2013/2014.
A top REIT pick
FRT’s unit price climbed by 69% in 2012, however, we still continue to find this REIT attractive on valuation grounds. We think the recent price consolidation provides a good entry point for investors. We have a fair value of HK$7.28 and a BUY rating on FRT. FRT is our top pick among overseas retail S-REITs.
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