Analysts' Recommendation

Starhill - Reportedly talks about acquisitions... and the regulator is looking at key tax changes

Macquarie Research Equities, 29 June 2006

By Matt Nacard

Bloomberg reports that, "Starhill Real Estate Investment Trust, controlled by Malaysia's biggest builder, said it's buying the Ritz-Carlton complex in Kuala Lumpur that will include the hotel and apartments, a transaction that would double its market value. The trust expects its market value to increase to 2 billion ringgit ($543 million) with the acquisition, said Francis Yeoh, managing director of YTL Corp., which controls the REIT. Starhill expects the acquisition in the next quarter, he said."

If indeed this is true, pricing will be key. We assume that Starhill would buy the property with a head lease back to YTL. We would also envisage that it would use a significant chunk of debt given its relatively low gearing of around 13% (debt to total assets). A further key trigger will be withholding tax relief. We believe the regulators are looking at the withholding tax of 28% on distribution from REITs to foreign investors. "Singapore is down to 10 percent, but we are still at 28 percent," Kris Azman Abdullah, director, issues and investment division, Malaysia's Securities Commission, said at a real- estate investment conference yesterday.

"It's a stumbling block for the Malaysian REIT market. We recognize that for markets to be attractive, they have to be internationally compatible" Malaysia's government in 2004 announced tax breaks to accelerate the development of real-estate investment trusts to compete with Singapore and the region in luring investors. The Securities Commission, the country's securities regulator, will recommend the lowering or abolishing of the withholding tax to the Ministry of Finance, he said. "Certainly, the challenge for us is to be more regionally competitive," he said.  We currently rate Starhill REIT an outperform with a target price of RM1.14.