SPH's The Seletar Mall, which is expected to be acquired by SPH REIT soon. (Photo: SPH)

DBS Equity Research has issued a ‘Buy’ rating on Singapore-listed SPH REIT citing an acquisition opportunity ahead of a lease renewal cycle at Seletar Mall.

“We believe that it is an opportune time for SPH REIT to consider acquiring The Seletar Mall from its sponsor, most ideally within the next six months prior to the asset undergoing its first renewal cycle at the end of 2017 as we see upside to rents”, said the bank.

DBS also believes that the market has yet to price in the upside from the potentially value accretive acquisition, which has been estimated to cost some SGD500 million (USD356 million).

“Following the potential acquisition of Seletar Mall, we estimate a 3-4% rise in DPUs on the assumption of an optimal funding scenario which involve a partial equity fund raising of SG200 million, said DBS, adding that this will increase SPH REIT’s gearing from 26% to 31%.

However DBS noted that this amount of leverage is still healthy in comparison to the retail REIT's peers' gearings, that average in at 34%.

With the acquisition, SPH REIT is also expected to derive a higher proportion of its income, from 20% to 32%, from what the bank deems as “necessity shopping”.

DBS has increased its target price for the REIT by 3% to SGD1.03.

Units of SPH REIT are currently trading on the Singapore Exchange at SGD0.975.

By Ridzwan Rahmat

Ridzwan has been analysing REITs and business trusts since 2008, and personally manages a portfolio comprising mainly of SGX-listed REITs. He founded REITsWeek in 2013.