Starhill Global REIT entered into new master tenancy agreements for the Starhill Gallery and Lot 10 properties in Malaysia with the current master tenant, Katagreen Development, the REIT manager said in a filing to SGX after the market close on Monday.
The existing master tenancy agreements for the Malaysia properties will expire in June, the filing said, adding those agreements contributed around 16.6 percent of the REIT’s net property income for the financial year ended 30 June 2018.
A master lease allows the lessee to sub-let the property for the period of the agreement.
The new agreement will be for long tenures of around 19.5 years and nine years for Starhill Gallery and Lot 10 respectively, with respective built-in rent step-ups of 4.75 percent and 6.0 percent from the fourth year and every three years after that, the filing said.
“The new master tenancy agreements provide SGREIT with income stability, rent growth and sustainable occupancy for the Malaysia properties,” the filing said. “The long tenure of the new master tenancy agreements will provide full occupancy for the Malaysia properties over a long period of time, thus ensuring income stability for SGREIT.”
It added that the transaction was “timely” as competition in mid-to-high-end retail in Kuala Lumpur is set to intensify, with the retail supply within a 10 kilometer radius from the two properties expected to increase by around 31 percent over a five-year period, likely pressuring the rental and occupancy rate.
For Starhill Gallery, Katagreen specified for asset enhancement works on the mall, which the tenant will undertake and which are expected to be completed before the third year of the new agreement, the filing said.
The works, which are expected to cost 175 million ringgit, or around S$58.1 million, will include a revamped mall entrance, refreshed interiors and converting the top three floors into hotel rooms as an extension of the adjoining JW Marriott Hotel Kuala Lumpur, it said.
The REIT will cover the costs of the works, the filing said, adding it would be financed by a combination of external borrowings and internal working capital.
The tenant will receive a rental rebate of 26 million Malaysian ringgit each year during the asset enhancement works period, and once works are completed, initial annual rents will be 1.5 percent, or 1.3 million ringgit, higher compared with expiring rents.
The master tenant is an indirect wholly owned subsidiary of YTL Corp., which is Starhill Global REIT’s sponsor, it said. YTL holds around 37.09 percent of Starhill Global REIT and 100 percent of the REIT’s manager, YTL Starhill Global REIT Management, it said.
Unitholders’ approval will be required for the master tenancy agreement, and an extraordinary general meeting (EGM) will be convened, the filing said.