Link deal shows there is no room for politics

City Talk | Simon Lee 1 Dec 2017

Link REIT announced this week the sale of a portfolio of properties that includes 17 malls for HK$23 billion.

That sum represents a 52 percent premium to the appraised value of the portfolio as of September.

Why did the buyer pay such a huge premium? That is because it is rare for owners of malls in Hong Kong to offer them for sale.

It has been six years since Swire sold Festival Walk to Mapletree for HK$18.8 billion.

Other major transactions are mostly offices, for instance, the Center, which sold last month for HK$40.2 billion.

Rarity aside, the malls and fresh markets run by Link REIT are still likely undervalued, as its management is under political pressure to set rent level somewhat conservatively.

Politicians who voiced concern that the new landlord might charge market-level rents also confirm the fact that Link REIT has been charging too little.

As anyone with his wits about him can tell you, public-housing tenants will not accept salaries lower than the market rate just because taxpayers subsidize their rents.

Retailer too will not ask for less even if there is a rent concession. It is this simple logic that the media and politicians have failed to understand.

There is no reason for the public to subsidize any business, even for mom-and-pop stores.

In fact, there are always opportunities for small retailers to offer something different to consumers with exquisite tastes.

In the world of business, one must have either economies of scale or quality for premium pricing. Some shops opt to stay small to offer higher-quality goods and services.

Other retailers build clout through relentlessly improving operating efficiencies.

However, there are also shops that have failed to scale up and discover a distinct market positioning.

Let me be blunt. It is time to stop glorifying and encouraging business failures.

It is also time to realize that public housing, the "sacred cow" of Hong Kong politics, are voting blocs that create incentives for politicians to become rational populists.

It is too much politics for any single firm to handle.

Therefore, although it is desirable for Link REIT to invest in these community malls and hold them for long-term returns, it is reasonable too for Link REIT to realize the values of its asset through divestments.

Business is business, and there should be no room for politics.

Simon Lee is a business consultant

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