Starhill Global REIT - UOB Kay Hian 2016-06-23: Toshin Concludes Triennal Rental Review

Starhill Global REIT - UOB Kay Hian 2016-06-23: Toshin Concludes Triennal Rental Review STARHILL GLOBAL REIT P40U.SI 

Starhill Global REIT (SGREIT SP) - Toshin Concludes Triennal Rental Review

  • Starhill Global recently secured a 5.5% base rental uplift over a three-year period with effect from 8 June for its Toshin masterlease at Ngee Ann City. This comes as Orchard Road rents registered the sixth consecutive quarterly decline. 
  • Maintain BUY with a higher target price of S$0.92 as we factor in the accretion from the rental review.


  • Starhill Global (SGREIT) announced a 5.5% increase in base rent for its Toshin masterlease, effective over the next three years from 8 Jun 16. The new rate agreed upon was based on the average of three independent market rental valuations.


  • Triennial upward-only rental review was made under the master lease agreement that Toshin has with Starhill at Ngee Ann City, which expires in June 2025. Up for renewal every three years, this year’s upward-only rent review was recently concluded in June, representing the second exercise since Toshin renewed its master lease agreement for a period of 12 years (commencing 8 Jun 13). Toshin, which is also Starhill's largest tenant, accounted for approximately 19.7% of SGREIT’s portfolio gross rent in Mar 16. The rent hike of 5.5% came in higher than our assumed 3%, thus we have increased our FY17 DPU forecast by 0.8%.
  • Orchard Road rents continue to slacken for the sixth consecutive quarter, reaching S$32.50 psf pm in 2Q16 (-4.4% yoy, -1.1% qoq), according to industry consultant CBRE. Comparatively, suburban rents which only started to register a decline from 4Q15, have been relatively more resilient, shrinking by a smaller 0.7% qoq (-2.8% yoy) to S$29.45 psf/month.
  • Potential beneficiary of pick-up in tourist arrivals, as Orchard Road assets Wisma Atria and Ngee Ann City make up 66.5% of overall portfolio value. We reckon demand could see a pick-up in tandem with resurgent visitors from Indonesia and China. Visitor arrivals in 4M16 saw continued double-digit yoy growth, underpinned by blistering growth from China (+53.2% yoy), and the nascent pick-up from Indonesia (+9.6% yoy). Management noticed an uptick in demand from the Indonesians, likely due to favourable currency movements, with STB revealing that shopping accounted for 28% of Indonesian tourism receipts in 2015. Our channel checks indicate prevalent cautious spending habits among affluent Chinese. Shopping accounted for 45% of Chinese tourism receipts in 2015, according to the STB.
  • Better positioned for a challenging retail environment. SGREIT is likely to display more resilience in an otherwise lacklustre sector, with its diversification across geographies and asset classes. 1Q16 saw overseas assets comprise 38.3% of gross revenue. Bearing in mind the lack of office supply in Orchard, the office component (100% occupied) contributes to 13.7% of gross revenue. Increased retail space, rising labour costs and threats from alternative retail channels have in part prompted retail landlords CapitaLand Mall Trust (CMT) and Frasers Centrepoint Trust (FCT) to guide for a moderation in rental reversions.


  • The agreed upon rental review uplift of 5.5% comes at a higher rate than our built-in assumptions of 3%. We have factored in the accretion by increasing our FY17 DPU forecast by about 0.8%.


  • Maintain BUY with a higher target price of S$0.92, based on DDM (required rate of return: 7.2%, terminal growth: 1.5%). The retail environment is expected to remain challenging with increased supply, rising costs and threats from alternative retail channels.


  • Acquisition of new malls, asset enhancement initiatives and development projects.
  • Positive newsflow on retail rentals, consumer spending, wage increments and mall occupancy.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-06-23
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.92 Up 0.91