Keppel REIT propped up by one-off gains in Q3 as rents dip

Risks are piling up for the office landlord.

Keppel REIT reported marginal income growth in the third quarter, but analysts from Barclays warn that all is not well beneath the rosy headline figure.

Barclays noted in a report that Keppel REIT’s third-quarter results were supported by divestment gains from the disposal of Prudential Tower.

“Despite a 16% positive rent reversion YTD and marginally lower occupancies, KREIT’s 3Q15 operating income took a hit from higher marketing costs for backfilling some 100,000sf of attributable space given up this year and forward renewals,” Barclays said.

In particular, One Raffles Quay income dropped 14% quarter-on-quarter, while income support at Ocean Financial Centre ceased in Q3.

During the quarter, three out of KREIT’s four Singapore properties lost tenants as Ocean Financial Centre and One Raffles Quay, which were fully occupied in 2Q15, are now 99.7% and 99.8% occupied, while MBFC occupancy declined 1.5ppt to 97.3%.

“Though KREIT has been proactive in forward renewing the leases and has completed 100% of all leases due for renew and almost all leases due for renewal in 2015, in 2016, 16.3% of NLA is up for renewal and 4.5% of NLA is up for review. In 2017, 12.1% and 3.8% of NLA will be up for renewal and review, respectively. We expect the manager to become defensive in retaining tenants and spot rents could dip,” Barclays said.

“KREIT remains cautious about the upcoming supply overhang next year. With over 36% of KREIT’s NLA up for renewal or review over 2016-2017, we see downside risks,” Barclays noted.