Why I’m Avoiding Starhill Global REIT for Now
Starhill Global REIT (SGX: P40U) shares have outpaced the broader Singapore market so far this year. Its units have climbed 10% year-to-date compared to the Straits Times Index‘s (SGX: ^STI) return of 2%.
However, despite the optimism surrounding the REIT, I will not be buying shares of this REIT just yet. Here’s why.
Limited growth in sight
Ngee Ann City is one of Starhill’s major revenue contributors. For perspective, Toshin Development Singapore Pte Ltd, the master lessee for Ngee Ann City, accounted for 22.9% of the REIT’s total gross rent. Toshin’s agreement with Starhill Global REIT expires in 2025 and has a rent review every three years.
In the most recent rent review in June 2019, the master lease base rent was not increased. Although the master lease does provide some income stability, the fact that the base rent was not increased for the next three years will certainly disappoint investors.
Its other retail property in Singapore, Wisma Atria, has also fared poorly in recent years. The iconic Orchard Road shopping mall dragged down the REIT’s net property income in the quarter ended 30 June 2019 thanks to higher operating expenses.
On top of that, in the most recent quarter, management said that although Wisma Atria maintained a high occupancy of 99.6%, it was achieved at a “softer rent.”
Limited prospects for yield-accretive acquisitions
Besides the limited growth prospects in its two key Singapore properties, Starhill also does not have the financial power to make yield-accretive acquisitions.
As of 30 June 2019, its gearing was 36.1%, which is about in line with the average among REITs in Singapore. It’s also fairly close to the regulatory ceiling, giving it limited debt headroom. Its cost of debt (of 3.28%) is also fairly high, which has resulted in a high interest cover.
These two factors will limit the REIT’s ability to take on more debt for yield-accretive acquisitions.
Starhill’s units also sport fairly rich valuations. Based on its unit price of S$0.75, its trailing yield stands at just 5.9%, which is lower than the average REIT yield of 6.18%.
Moreover, although Starhill REIT has a large exposure in Singapore, the REIT is also exposed to foreign currency risk. It has three properties in Australia, two in Malaysia, two in Japan, and one in China. Its Australia and China properties will continue to face currency headwinds in the future, which could also be a drag on earnings.
With these factors in mind, I believe there are more attractive REITs available in the Singapore market that can make my money work harder for me.