SINGAPORE (Oct 7): CGS-CIMB Research is keeping its “hold” recommendation on Starhill Global REIT (SG REIT) with a lower target price of 75 cents, down from 79 cents previously, on expectations of muted near-term growth due to the weak economy.

But lead analyst Eing Kar Mei believes a couple of potential investments in the pipeline could trigger and drive growth in the longer term.

SG REIT is said to be planning to unlock an unutilised gross floor area of 100,000 sq ft between Ngee Ann City and Wisma Atria, which could coincide with the upcoming Orchard MRT station on the Thomson-East Coast Line in 2021.

The 100,000 sq ft space could be used to connect to the MRT station via the construction of covered walkways both above- and 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,” Eing says in an Oct 4 report.

Meanwhile, SG REIT has also submitted an expression of interest to acquire Isetan Singapore’s strata area at Wisma Atria.

Isetan currently owns 26% in Wisma Atria’s total share value of strata lots, with the remaining owned by SG REIT.

See: Isetan confirms interest from Starhill Global for Wisma Atria stake; shares surge to multi-year high

“Based on our estimates, the valuation of Isetan’s stake in Wisma Atria (at $4,600 psf) is significantly lower than the valuation of SG REIT’s stake in the property (at $6,300 psf),” says Eing.

Eing notes that there is a large rental gap between the areas at Wisma Atria owned by Isetan and SG REIT. Based on her estimates, the areas owned by Isetan command rental of around $13 psf, compared to rental of around $34 psf for areas owned by SG REIT.

The way she explains it, this disparity is because many of Isetan’s tenants occupy large floor spaces that usually command a lower rent psf.

“We believe SG REIT could improve rental yield with the right strategy,” Eing says.

“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,” she adds.

As at 3.50pm, units in SG REIT are trading at flat at 74 cents, implying an estimated price-to-book value (P/BV) of 0.8 times and a dividend yield of 6.0% for FY20F.