Can Keppel DC REIT stand its ground against multinational data centre players?

According to Cushman & Wakefield, there is a risk of an oversupply of data centres in Singapore.

Keppel DC REIT may face high barriers to entry and stiffer competition to attract and retain tenants at its data centres, according to a report by DBS Equity Research. 

The report highlighted how negative newsflow had an adverse impact on the firm given its role as a niche player in the data centre market with no flexibility in terms of asset type diversification. It further added that competition from larger third party data centre players could pose a threat to the firm given that the market is largely dominated by international operators aggressively expanding into Singapore.

According to Cushman & Wakefield, there is a risk of an oversupply of data centres in Singapore which is likely to result in limited organic potential for its Singapore data centres. DBS’ analysts however noted that in 2019, the REIT’s markets in Singapore, Europe and Australia may continue to see strong demand for data centres on the back of global growth in data centre usage.

Also read: Data centre operators turn West amidst Tai Seng space crunch

OCBC Investment Research (OIR) analysts further highlighted in a separate report that in terms of sponsor pipeline, the potential acquisition of Keppel DC Singapore 4 could continue to bear fruit for the firm in the future. The proposed acquisition is expected to take place either in 2019 and 2020. 

Keppel DC REIT’s acquisitions are forecasted to drive up its distribution per unit (DPU) going forward as the targeted return for its newly acquired properties is expected to hit 6.5%, according to a report by DBS Equity Research.

Keppel DC REIT’s net property income (NPI) grew 26% YoY to $157.67m in 2018, whilst for Q4, NPI climbed 30.1% YoY to $42.47m from $32.65m. Gross revenue for the Q4 also jumped 30.5% YoY in Q4 to $48.04m from $36.83m in 2017, whilst distribution per unit (DPU) rose 5.7% YoY to $0.0185 in Q4 from $0.0175, its financial statement revealed.

Also read: Keppel DC REIT's NPI jumped 26% to $157.67m in 2018

“Over the relatively young life of Keppel DC REIT, its price has largely moved in tandem with the S-REIT Index with a strong correlation coefficient of 0.84,” DBS’ analysts noted. “Keppel DC REIT remains one of the few REITs in Singapore that can acquire new assets at a lower cost of capital.”

In 2018, the firm acquired Keppel DC Singapore 5 and maincubes Data Centre in Offenbach am Main, Germany which contributed largely to Keppel DC REIT’s strong performance in Q4. The REIT also entered into an agreement to acquire the remaining 999-year leasehold land interest in Keppel DC Dublin 1 during the year which is expected to be completed in H1 2020.

Keppel DC REIT also highlighted in its financial statement how it had received an early ‘ang bao’ from tax authorities in Singapore in the form of a tax transparency status for Keppel DC Singapore 5 which is said to boost distributions from Q1 2019 onwards. With a sustained portfolio occupancy of approximately 93% and as Keppel DC Singapore 5 ramps up operationally, analysts expect that the firm could see higher revenues in the medium term.

Also read: Keppel DC Singapore 5 could deliver an initial 7.8% yield in H2 2019

“The strong take-up for the units attests to investors’ favourable view on the REIT’s outlook,” the analysts commented. “Post-acquisition, gearing is estimated to remain at a conservative 32% which is within Keppel DC REIT Management’s comfortable range.”

Meanwhile, the report noted how interest rate movements measured by the Singapore 10-year government bond yield seemingly had no significant impact on Keppel DC REIT’s price, which the analysts attributed to the firm’s proactive management of Keppel DC REIT’s debt profile. “As such, we believe that Keppel DC REIT’s distributions are well hedged against interest rate movements,” they explained.