Starhill yields Reit IPO for Malaysia

Malaysia gets its first benchmark Reit

Malaysia's YTL Corporation raised M$513 million ($136 million) from the spin-off this Friday (December 2) of some of its property assets into a Reit. The DBS, ECM Libra and HSBC led transaction for Starhill Reit represents the first benchmark listing of a Malaysian Reit following a smaller $32.5 million deal for Axis Reit back in August.

After being marketed at M$0.93 to M$1.03 per unit, the 509.6 million unit deal was priced at M$1.01 for institutional investors (479.6 million units) and M$0.96 for local retail (30 million units).

The overall order book closed 8.8 times oversubscribed with participation by 120 institutional accounts, of whom 20 placed orders for more than $10 million. By geography, the deal had an allocation split of 32% Malaysia, 20% UK, 19% Singapore, 11% Hong Kong, 10% Continental Europe and 8% rest of the world.

Locally the retail book closed 6.27 times covered and was said to have been more price sensitive than the institutional book. A slightly less enthusiastic response from local investors is probably not that surprising given their lack of familiarity with the sector.

International investors, on the other hand, will be hoping Malaysia now follows the same pattern as Singapore and recently Hong Kong, where double digit returns have been generated by high initial yields and strong follow-through buying.

Starhill Reit has been priced on a 2006 yield of 6.27%, although Malaysia's tax laws means that the net yield for non-resident investors is 28% lower. Malaysia's dividend tax regulations are more punitive than either Singapore (10%) or Hong Kong (zero), although observers say that many of the big institutional accounts will get round them by registering onshore entities before the first dividend is paid next year.

On an NAV basis Starhill has been priced at a 3% premium and at 183bp over the risk free rate - 10-year Malaysian Treasuries are currently trading at 4.4%. On a gross basis, this is exactly the same level Hong Kong's Link Reit was priced at in late November - 6% dividend yield and 3% premium to NAV versus a Treasury rate of 4.4%.

Axis Reit is currently yielding about 7%.

In Singapore, the three closest comparables would be retailed oriented Reits for Suntec, Fortune and CapitaMall Trust (CMT), which are respectively trading at yields of 4.8%, 5.8% and 4.5%. In turn, this represents a premium of 190bp, 140bp and 160bp over their respective government bonds - Fortune houses retail malls in Hong Kong, whereas Suntec and CMT are based in Singapore.

Starhill has three main assets located in Kuala Lumpur's prime shopping district, Bukit Bintang, also known as the Golden Triangle. The biggest asset is the Starhill shopping centre, which has 295,0006 square feet of lettable space, a current occupancy ratio of 99.9% and appraised value of M$480 million.

Second is the Lot 10 shopping centre, which comprises 174,116 square feet of lettable space, with a 96% occupancy ratio and an appraised value of M$341 million. Finally, the listco also houses Kuala Lumpur's Marriott Hotel, which has an appraised value of M$329 million.

The Reit manager will be Pintar Projek Berhad, a 70% owned subsidiary of YTL Corp. The parent will continue to own 51% of the Reit post listing, while 49% will be in freefloat.

Proceeds are primarily being used to fund the acquisition of the three assets from the parent, leaving Starhill with gearing of 14.85% - low by Reit standards. The parent has further assets that can be injected at a later date including its ownership of KL's Ritz Carlton hotel. However, analysts add that none of these assets are currently high yielding enough to generate the 6% return on the Reit.

According to the group's listing prospectus, the Reit will pay out 100% of its income for the first two years after listing and 95% therefore. This should result in a yield of about 6.5% in FY 2007 and 6.36% in FY 2008.

Likewise Starhill is promising strong income growth. Even without potential new acquisitions, the group believes that net property income will jump from M$59 million in 2005 to M$80 million by 2007 and M$82 million in 2008.

Income generation will come from upward rental reversions at a time of increasing retail spending in Malaysia. The Malaysian Retail Association, for example, has forecast a roughly 6.5% increase in retail sales growth during 2005.

Analysts also point out that Middle Eastern tourists have provided a strong sales kicker for Malaysia and particularly Kuala Lumpur.

So too, the YTL has a strong track record for generating positive returns on its investments. It purchased the three assets for M$323 million in 1999. Today, they have an appraised value of M$1.2 billion.

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