4 REITs that can ride on China's Covid-19 recovery

As the fight against the Covid-19 virus rages on, China has emerged as a surprising winner.

The coronavirus first made its appearance in the city of Wuhan back in January.

Since then, China has moved swiftly to contain the pandemic within its borders.

The disease has now been largely contained since March, though there have been minor, small-scale outbreaks occurring periodically.

China has not reported any locally-transmitted symptomatic case since mid-August, and as recently as Oct 15, only 11 new Covid-19 cases were reported, of which one was locally transmitted.

For a country with a population of around 1.5 billion people, it was no mean feat to ensure that everyone is kept virus-free.

The authorities have continued to impose stringent controls and mass testing, with the recent mass swabbing of 10 million people in the city of Qingdao over fears of another outbreak.

As such, we feel comfortable with China’s tough stance on controlling the pandemic and feel that life will transition to a post-Covid “new normal”.

With signs of normalcy persisting, we feel confident that these four REITs should continue to perform well.

1. CapitaLand Retail China Trust 

CapitaLand Retail China Trust, or CRCT, is the largest China shopping REIT listed on the exchange.

It has a portfolio of 13 shopping malls located in eight Chinese cities. As of June 30, 2020, CRCT’s asset size is around $3.8 billion.

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For the first half of 2020, the REIT reported an 8.7 per cent year on year decline in gross revenue, largely due to the lockdown of malls in the first quarter of the year.

The distribution per unit (DPU) fell by 41.1 per cent year on year to $0.0302 and was partly due to income retention amounting to $1.8 million.

By June 2020, retail sales had recovered to be down by just 1.8 per cent year on year, and CRCT’s portfolio recorded a 25.9 per cent quarter on quarter improvement in shopper traffic in the second quarter.

At end-September, CRCT announced an expansion of its investment strategy to include office and industrial properties as well.

The aim is to position the REIT for stronger growth in future and to seize a wider range of opportunities.

2. Mapletree North Asia Commercial Trust

Mapletree North Asia Commercial Trust, or MNACT, owns a portfolio of 11 properties in China, Hong Kong and Japan.

These properties have a lettable area of around 5.2 million square feet and a book value of $8.3 billion as of June 30, 2020.

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In a business update for the quarter ended June 30,  2020, Covid-19 continued to impact the REIT, which saw gross revenue fall 10.7 per cent year on year to $93.7 million.

Net property income fell by nearly 20 per cent year on year $68.5 million.

Although the outlook remains weak due to lower demand for office space and retail due to the pandemic, the REIT did engage in an acquisition of an office property in South Korea to diversify its rental income sources.

MNACT has also expanded its investment mandate to include South Korea as it believes the country is one of the top three investment destinations in the Asia-Pacific region.

3. Sasseur REIT 

Sasseur REIT is the first retail outlet mall REIT listed in Asia, and its portfolio consists of four retail outlet malls located in the cities of Chongqing, Kunming and Hefei in China.

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For the first half of 2020, rental income fell by 10.4 per cent year on year to RMB 268.1 million (S$54 billion), while DPU declined by 12.8 per cent year on year to $0.02846.

The second quarter saw a strong recovery in the malls’ combined tenant sales close to pre-Covid levels, being just 18.6 per cent lower year on year.

DPU for the second quarter increased by 13.3 per cent compared to the first quarter to $0.01512, demonstrating a steady recovery as China eased lockdowns.

Asset enhancement initiatives (AEI) are taking place for the Chongqing and Hefei malls and are expected to achieve better asset yields and ensure sustainable rental income for the properties.

4. EC World REIT 

EC World REIT is a Chinese specialised logistics and e-commerce REIT with a portfolio of eight properties located in Hangzhou and Wuhan.

Gross revenue showed a healthy improvement in the second quarter compared to the first, up 19.8 per cent to $28.2 million.

DPU after retention improved quarter on quarter from $0.01158 to $0.01386, up around 20 per cent.

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The REIT’s portfolio of assets has master lease agreements with embedded rental escalation clauses, providing organic growth for the portfolio.

E-commerce demand is expected to continue to propel the logistics sector in the remainder of 2020.

Recently, EC World REIT announced that it had renewed a major lease for around 159,000 square metres of space. This lease negotiation had previously stalled due to Covid-19.

Separately, the REIT also managed to lease out 22,500 square metres of warehouse and dormitory space to a reputable e-commerce company.

For the latest updates on the coronavirus, visit here.

This article was first published in The Smart Investor. Disclaimer: Royston Yang does not own shares in any of the companies mentioned.