Yahoo! News, 28 November 2005, 3:56 PM
By Carolyn Lim
of DOW JONES NEWSWIRES
KUALA LUMPUR (Dow Jones)--Malaysia's Starhill REIT will be able to pay at least 90% of its earnings as a dividend, as rents at its malls have the potential to rise and will offset any damage central bank monetary tightening policies may cause to yields, a company executive said.
"This REIT is not as sensitive to interest rates as others because rents (at Starhill malls) have not reached the top, and are nowhere near toppish," Starhill REIT Chief Executive Francis Yeoh, a Malaysian billionaire who also controls YTL Corp. (4677.KU), told Dow Jones Newswires.
Worth MYR1.05 billion, Starhill is Malaysia's biggest real estate investment trust and is currently marketing 509.6 million units to domestic and international investors at an indicative MYR1.03 each for institutional bidders. YTL will own 51% of the REIT.
But the sale comes ahead of a widely expected 30-basis-point rise in Malaysia's overnight policy rate to 3%, the first monetary-tightening move by Bank Negara in seven years that could dampen interest for REITs and property stocks.
Based on the indicative institutional price of MYR1.03 a unit, Starhill will yield 6.12% a year if it pays 100% of earnings as a dividend next year and in 2007. Higher interest rates would narrow the yield premium enjoyed by REITs, making them less attractive to investors, analysts say.
Hong Kong's Cheung Kong Holdings Ltd. (0001.HK) has, for instance, reportedly said it may drop a plan to float a REIT if interest rates there keep rising.
Starhill's Yeoh says he is unfazed by the threat of higher interest rates, as rents will rise at the REIT's Lot 10 and Starhill shopping malls in Kuala Lumpur's prime shopping district.
Retail sales are forecast to rise 7% in 2005, and by the same percentage again in 2006, according to Starhill's prospectus. Its Lot 10 mall is 98% occupied, while the Starhill Gallery is fully tenanted, the document added. Such a scenario means steady rent increases are likely, analysts said.
An economic pick up will also help J.W. Marriott hotel, which is also being sold in the REIT.
At up to MYR27/square foot, rental at Starhill Gallery's prime upper ground floor is 23% less than up to MYR35 charged at Suria KLCC, the capital's most high-profile mall, located at the base of the 88-floor Petronas Twin Towers.
Consequently, Starhill expects to raise rents at its flagship Starhill Gallery mall by 5% to 20% for its two best floors over the three years to 2008, the REIT's prospectus states.
Increases of 10% to 35% are projected for all of the Lot 10 mall over the same period, according to the prospectus.
Starhill is also looking to buy other malls carrying luxury brands with "the right traffic," Yeoh said.
Yeoh says that unlike other malls that offer brands targeting a wide range of shoppers, Starhill Gallery is focused on enticing the "super inelastic recession-free" rich, who will shop regardless of economic conditions.
The mall houses brands including Louis Vuitton, Versace, Gucci and Kenzo, and boasts Malaysia's biggest shopping space dedicated to expensive watches.
Yeoh thinks the emphasis on branded watches is right for Starhill Gallery as such products are duty-free in Malaysia and the relatively lower rents in the capital - compared with other cities - mean lucrative margins for his tenants.
According to a Wall Street Journal Asia survey Friday, Kuala Lumpur has the most competitive prices in the region for branded watches and jewelry, and ranks second after Hong Kong for fragrances and cosmetic products.
"This type of retail industry is exciting," Yeoh said, adding that at least 90%, if not all, of earnings would be paid out as a dividend in the long run.
Institutional book-building for Starhill's initial offer will close Dec. 1. As at Friday, the offer is one time covered at the low end of indicative pricing, said a source close to the deal. The roadshow for the offer moves to Hong Kong Monday, Holland Tuesday, and London Wednesday. Yeoh's YTL will retain 530.4 million, or a 51% stake.
-Carolyn Lim, Dow Jones Newswires; (603) 2692 5254,
-Edited by Hasan Jafri and Craig Lewis
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