• Starhill Global REIT's key properties Ngee Ann City and Wisma Atria face challenging times given the lack of tourists and local traffic to Orchard Road with COVID-19 outbreak.
• Australia exposure impacted by weak currency and weakening operating data.

Speedbumps Ahead

• While we like Starhill Global REIT (SGX:P40U) for its diversified earnings base supported by 49% of revenues pegged to stable long-term leases with periodic rent reviews, we see challenges for its malls in Singapore and Australia which are impacted by the ongoing COVID-19 outbreak and falling consumer demand.
• We cut our target price to factor higher cost of equity assumption and earnings estimates by 8%-12%.
• Our revised target price of S$0.45 reflects higher beta assumption mirroring a recessionary environment, compensated by lower risk-free rates.

Challenges Rising for Its Singapore and Australia Malls

• We see rising vacancy risk for Starhill Global REIT's Singapore office and retail space (Wisma Atria) given the tightening measures introduced by the government on limiting tourists (its main target market) and locals. We see a majority of tenants across various trade sectors looking for some form of rental assistance in the coming quarters given the quieter foot traffic.
• Similarly in Australia, lower consumer spending is anticipated given the lockdown on travel into Australia.

Future Proofing of Starhill Gallery Will Contribute in the Medium Term

• Currently under construction, the completion of AEI for its Malaysian assets may be delayed given the local movement restriction. That said, there is minimum downside in the interim with rentals (albeit at a 50% discount) paid by its Sponsor.
• Income visibility will be greatly enhanced with a new master lease agreement of 19.5 years and 9.0 years for Starhill Gallery and Lot 10 respectively when completed sometime at the end of 2021.

Source: DBS Research - 2 Apr 2020