- Keppel REIT (KREIT) is the owner of Singapore’s CBD crown jewels: Ocean Financial Centre (79.9% interest, 23.7% of FY20 net property income), Marina Bay Financial Centre (Towers 1, 2 and 3 and the subterranean mall, Marina Bay Link Mall) (one-third interest, 33.9% of NPI), and One Raffles Quay (one-third interest, 13.8% of NPI).
- The REIT is 49.84% owned by Temasek Holdings, and is closely tied to Keppel Group, expected be a top 5 tenant in 2Q21.
Company Background
Listed on the Singapore stock exchange on 28 April 2006, KREIT owns a S$8.9bn portfolio in Grade A commercial properties in Singapore (78.0% of AUM), key Australian (18.5%) cities of Sydney, Melbourne, Brisbane and Perth, as well as Seoul, South Korea (3.5%). It has a market cap of S$4.4bn as of 22 March 2021. The REIT is sponsored by Keppel Land Limited and managed by Keppel REIT Management Limited, a wholly-owned subsidiary of Keppel Capital Holdings Pte Ltd.
Properties:
- Singapore
- Ocean Financial Centre (79.9% interest)
- Marina Bay Financial Centre (Towers 1, 2 and 3 and the subterranean mall, Marina Bay Link Mall) (one-third interest)
- One Raffles Quay (one-third interest)
- Australia
- 8 Chifley Square, Sydney (50% interest)
- 8 Exhibition Street, Melbourne (50% interest in the office building and a 100% interest in the three adjacent retail units)
- 275 George Street, Brisbane (50% interest)
- David Malcolm Justice Centre, Perth (50% interest)
- Victoria Police Centre2, Melbourne (50% interest)
- Pinnacle Office Park3, Sydney (100% interest)
- South Korea
- Tower, Seoul (99.4% interest)
Recent Business Updates
- Positive single-digit rental reversions expected in 2021. Singapore’s Grade-A Core CBD office rent declined 2.8% QoQ to S$10.40psf pm in 4Q20. Despite the decrease, the market rents are still above expiring rents of KREIT’s expiring leases in 2021, at S$9.76psf pm. Marina Bay Financial Centre Towers 1 & 2 and One Raffles Quay cap rates also tightened from 3.63% to 3.45%, showing resilience in the soft office market. KREIT’s average weighted signing rents was S$11.02psf pm (-0.1% QoQ), above the market average of S$10.40psf pm.
- Recovering leasing enquiries. KREIT’s Singapore portfolio valuations were down 1.5% YoY in 4Q20 due to weaker occupancy of 97.9% (4Q19: 98.8%) and lower rents. However, leasing enquiries have since picked up, driven by non-bank financial institutions and technology sectors. ByteDance/TikTok took up 80,000sf of office space at One Raffles Quay and have embarked on a hiring spree, while Lazada and Tencent seek to expand operations in Singapore. Demand for co-working and flexible office spaces have also risen. Separately, the relocation of UBS from One Raffles Quay to 9 Penang Road was completed, and KREIT has backfilled 60% of the 230,000sf vacancy, with another 30% in advanced negotiations. The new tenants are from financial and real estate sectors. 13.9% of leases in Singapore are up for expiry in 2021.
- Growing overseas business. In Seoul, CBD Grade A occupancies have stabilised at 86.9%, off the 2020 lows of 85.1%, while rents are at a 5-year high of KRW97k per py pm. In Australia, practical completion of the S$380mn Victoria Police Centre (50% ownership, 100% committed occupancy) was achieved on 9 July 2020, leased to the Victoria Police for 30 years, while acquisition of the S$302.1mn Pinnacle Office Park (100% ownership, 96.9% committed occupancy) in Sydney was also completed on 30 December 2020. Australia properties boast longer weighted average lease expiries of 12.8 years compared to 2.9 years for Singapore and 2.0 years for South Korea. KREIT’s Australian exposure grew to 18.5% of AUM YoY from 15.7% in 4Q19.
- Keppel Bay Tower (100% interest) acquisition bumps Keppel Group to top 10 tenant of KREIT. The acquisition of the Grade A office located in the HarbourFront/Alexandra submarket in Singapore is expected to complete in 2Q21 for a consideration of S$667mn. As headquarters of Keppel Group, 39.7% of NLA is leased to Keppel Group entities. Post-acquisition, 3.7% of KREIT’s total NLA will be leased to Keppel Group, making it KREIT’s 5th top tenant. Total portfolio committed occupancy will remain high at 98%, WALE at 6.3 years, and aggregate leverage at 39.0%. The acquisition will be funded by 60% debt and 40% equity.
Credit Profile
- Financial flexibility remains healthy. KREIT’s all-in interest rate was reduced to 2.35% p.a. YoY from 2.77% p.a. in 4Q20. Aggregate leverage stood at 37.3% and is expected to rise to 39.0% after the Keppel Bay Tower acquisition, low compared to the 50% ceiling by MAS. Undrawn credit facilities amounted to S$835mn, or 26% of total borrowings.
- Strong stakeholders. As of 3 March 2020, Temasek Holdings owns 49.84% of KREIT. The REIT is also closely tied to Keppel Group as a top 5 tenant.
Risks
- Soft office market rents and occupancies could persist. Lease expiries could lead to vacancies as tenants seek cheaper fringe offices or business parks. However, leasing enquiries from new tenants has picked up recently. Average CBD office supply in the next 4 years is expected to be moderate at 670,000sf p.a., compared to 600,000sf p.a. the past 3 years. We expect demand to be able to absorb supply.
- Government rental support will eventually end. KREIT’s rental collection in 4Q20 was 98%. Tenant relief measures was S$14.6mn including S$9.9mn of government property tax rebates and cash grants. Total rent deferrals was low at S$1.9mn.
