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Zurich-based Asia property boutique names top off-benchmark bet

Zurich-based Asia property boutique names top off-benchmark bet

Hong Kong-based real estate investment trust Sunlight is the perfect illustration of Citywire AA-rated Charles Isaac’s approach to stock selection.

Isaac’s B&I Asian Real Estate Securities fund is run with a bottom-up approach and is quite concentrated with around 30 positions in the portfolio. Typically 80% of the fund’s assets deviate from the benchmark.

His main criteria for stock selection are high total return and dividend growth potential. Sunlight ticks both of these boxes.

‘The company has a 5.3% current yield, we forecast its distribution per unit to grow an average 6% over the next three years, and therefore its total return is over 11% a year.’

Sunlight is relatively cheap, Isaac says, trading at half of its book value. It’s not widely followed, because of its relatively small size.

‘Much of the sell-side won’t cover a name like Sunlight as it is not economical for them. The AUMs of the larger buy-side houses are so big that they are not able to build a mean­ingful position and therefore won’t cover it. The company is not in main indices so does not attract closet indexers or passive money.’

B&I Capital has an office in Singapore with four people focusing on the Asian Reit market. This allows Isaac to spot names flying under the radar of many investors and buy into them at the IPO stage.

The fund manager has held his position in Sunlight for 10 years and it has returned 350% during that period.

One tailwind for Sunlight is that offices in Hong Kong have a historically low vacancy rate right now, below 2%. If this level remains or drops then rents will inevitably move up.

‘If you are a law firm in the central part of Hong Kong and your rent is getting more expensive, then you move a few hundred meters to so-called periphery areas. Chinese banks need to be situated at the best address and will remain in the central part, while back-office operations will move further away.’

Firms like Sunlight will benefit from this trend as they have properties in periphery are­as and charge the rents 15-20% below market level. ‘As the market prices are going up, rents will be increasing as well and this is where 8% dividend growth comes from,’ he says.

The company also renovates existing build­ings to make them efficient or attractive for shoppers, which benefits retail tenants.

Although Reits are less fashionable than physical real estate at the moment, Isaac says they still offer a lot of upside.

‘In Hong Kong investors struggle to buy a physical office building on a 3% yield. In the meantime office Reits trade at a 4.75-6% yields.’

 

This article originally appeared in the May 2017 edition of Citywire Switzerland magazine.

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