• Tapping into the unutilised 100k sf GFA and acquiring Isetan’s stake in Wisma Atria will help to boost income in the longer term, in our view.
• However, near-term growth may be more muted due to a weaker economy.
• Maintain HOLD with a lower DDM-based Target Price.

Planning to Unlock Unutilised 100k Sf GFA Between Wisma Atria and Ngee Ann City

• STARHILL GLOBAL REIT (SGX:P40U) is planning to unlock the unutilised 100k sf GFA between Ngee Ann City (NAC) and Wisma Atria (WA).
• We understand the space could be used to connect to the upcoming Orchard MRT station on the Thomson-East Coast Line by constructing a covered walkway above-and/or under-ground. This would enhance traffic flow to the malls and generate added rental income as more commercial space is built.
• Our calculation shows ROI to be in the low double-digits depending on construction cost. The timing of the project may coincide with the upcoming station in 2021, if approved.

Potential Acquisition of Isetan’s Strata Area at Wisma Atria

• Starhill Global REIT said that it has submitted a non-binding expression of interest to Isetan Singapore (SGX:I15) on the potential acquisition of Isetan's strata area at Wisma Atria. See Starhill Global REIT's announcements & Isetan Singapore's announcements.
• Based on our estimates, the valuation of Isetan’s stake in Wisma Atria (S$4,600 psf) is significantly lower than the valuation of Starhill Global REIT’s stake in the property (S$6,300 psf). A visit to Wisma Atria revealed that Isetan and Starhill Global REIT have different mall management styles. Generally, Isetan’s Wisma Atria looks newer and many of the tenants occupy large floor spaces that usually command a lower rent psf.
• Considering the large rental gap between the areas at Wisma Atria owned by Isetan (~S$13 psf based on our estimates) and Starhill Global REIT (~S$34 psf), we believe Starhill Global REIT could improve rental yield with the right strategy. Owning the entire property also makes it easier for future AEIs and tenant mix planning. However, there is no certainty that Isetan is willing to divest its stake in Wisma Atria.

Looking Forward

• While we see signs of stabilisation for Starhill Global REIT’s Singapore retail performance given improving overall tenant sales and occupancy in the past 3-4 quarters, we are concerned that occupancy rate of its offices will be affected by the weaker economic outlook.
• In Malaysia, Starhill Global REIT is still receiving interim rental of RM21m/annum as the asset enhancement works (AEW) are still pending a few approvals from the authorities. The underlying performance of its Australia assets should remain stable, but income may be affected by the weakening of the A$ versus S$.

Maintain HOLD

• While the above potential investments could drive growth in the longer term, near-term growth is muted due to the weak economy.
• Our FY20-22F DPU forecasts are reduced by 3-4%, factoring in
  1. lower rental income from Singapore office and
  2. a weaker AU$ vs. S$.
• Upside/downside risks include better/worse rental reversion.

Source: CGS-CIMB Research - 4 Oct 2019