StarHill Gbl – UOBKH
Highlights from Company Visit
Benefitting from opening of linkway. Shopper traffic at Wisma Atria increased 48% yoy in Jun 09 after the basement linkway connecting Wisma Atria to Orchard MRT station was reopened on 3 Jun 09 (closure lasted more than two years). Shopper traffic at basement was the heaviest and more than doubled compared to last year. We understand that many basement tenants experienced 10-50% increase in sales since Jun 08.
Worst fear did not materialise. ION Orchard did not affect business at Wisma Atria, confounding most sceptics. Shopper traffic to Wisma Atria actually increased by another 30% after the opening of ION Orchard on 21 Jul 09. Wheelock Place, ION Orchard, Wisma Atria and Ngee Ann City are linked to Orchard MRT station via an underground passageway. The opening of ION Orchard has attracted more shoppers to malls in the vicinity.
Enhancing Wisma Atria. Accessibility to Wisma Atria has improved with escalators from Orchard MRT station linked to new entrance at Wisma Atria Level 2 (new side entrance). Management plans to invest S$100m on asset enhancement initiative for Wisma Atria, which will add 40,000sf of prime retail space fronting Orchard Road. The planned extension is ideal for duplex stores, which are highly visible. Management is also evaluating feasibility of converting some car park space into retail space to further increase lettable area. Starhill Global REIT (SGREIT) needs to liaise with Isetan before finalising its plan.
Neutral impact from opening of IRs. The opening of the two integrated resorts (IRs) will lead to competition for shoppers. Local consumers will likely flock to shop at the IRs, especially during the initial stages. This will be offset by increasing tourist arrivals generated by the IRs. Orchard Road is consistently the most visited attraction in Singapore with 6m visitors each year. This means that three out of every five tourists make a point to shop at Orchard Road. Besides having late night shopping on Saturday till 11pm, Singapore Tourism Board (STB) will also work with Orchard Road Business Association (ORBA) to organise more activities along the pedestrian walkways to attract tourists and Singaporeans to Orchard Road.
New malls well taken up. Over 75% of retail space at Marina Bay Shoppes within Marina Bay Sands has been committed. Marina Bay Shoppes with 800,000sf of retail and restaurant space will offer 300 stores with an international mix of luxury brands when opened in early 2010. At Orchard Road, CapitaLand’s ION Orchard is 94% committed when it opened in Jul 09 while Far East Organisation’s Orchard Central is 80% committed when it opened in Jun 09. 313@Somerset by Land Lease is already 90% committed and is scheduled to open in Nov 09. Therefore, a significant portion of new supply of retail space at Orchard Road and nearby areas is already well taken up, supported by buoyant consumer confidence and domestic consumption.
Deteriorating outlook for office portfolio. Office occupancy for Wisma Atria and Ngee Ann City was 92.0% and 94.9% respectively at Jun 09. Occupancy could continue to deteriorate due to tenants relocating to low-cost alternatives offered by business parks. Office rentals are likely to be under pressure as a result of a massive 2.8m sf of office space being completed next year. The two office blocks at Wisma Atria and Ngee Ann City accounted for only 18.4% of total revenue in 2Q09.
China: recovery from Chengdu earthquake. Revenue contribution from Renhe Spring Departmental Store grew 42.6% yoy to S$3.6m in 2Q09 (10.8% of total revenue) due to recovery after Chengdu earthquake in May 08. The high-end mall houses premium foreign brands such as Prada, Dunhill, Bally, Hugo Boss, Ermenegildo Zegna, Chopard, Longines and Rolex and rental is largely based on gross turnover. The mall is fully occupied at Jun 09.
Working on regional expansion. SGREIT is on lookout to acquire retail assets in the region after raising S$337.3m from its recent 1-for-1 rights issue. It is evaluating opportunities to acquire assets in Australia and United Kingdom from distressed sellers as capitalisation rates in both markets had risen significantly. In China, SGREIT has the right of first refusal to acquire two more shopping malls in Chengdu from partner Renhe Spring Group. In Malaysia, SGREIT could acquire Starhill Gallery and Lot 10 in Kuala Lumpur from Starhill REIT listed on Bursa Malaysia but the process is likely to be protracted as this is a related-party transaction.
Major refinancing in 2010. Commercial mortgage-backed securities (CMBS) of S$380m and term loan of S$190m will mature in Sep 2010. Proceeds from its recent rights issue will be utilised to partially repay the term loan. SGREIT plans to stretch debt maturity of new debt facility over several years to prevent lumpy refinancing in the future. Ability to secure refinancing has improved with support from sponsor YTL Corporation. SGREIT has expanded its network of relationship banks through referral from YTL.
Sponsor confident of prospects for SGREIT. YTL has acquired and exercised 45.6m nil-paid rights bought through open market purchases, thus increasing its stake in SGREIT from 26.5% to 28.9%.