Weak rents loom for Keppel REIT despite $8.5b office assets

Vacancies are still high and plenty of secondary space is surfacing in the year ahead.

Keppel REIT’s portfolio of "high quality" office buildings makes it a key beneficiary of the impending recovery in Singapore’s office market, but Maybank Kim Eng doubts whether market rents can clear 2015 levels or not.

According to a report, negative rental reversion is expected to persist. The REIT has one of the largest office landlords with $8.5b worth of properties.

Vacancies still high and plenty of secondary space surfacing in the year ahead.

"We doubt office rents can rally enough to clear 2015 levels next year," said Maybank KE analyst Derrick Heng.

This implies that rental reversions should stay negative in 2018 considering the typical lease tenure of three years. Thus, underlying income is projected to remain under pressure.

The broker still raised its distribution per unit (DPU) forecasts for 2018 and 2019 to 2.3% and 3.4% to incorporate higher market rents.

Here's more from Maybank Kim Eng:

We believe there could be upside to the valuation of KREIT’s portfolio at the end of the financial year. Whilst the MBFC properties are held on the book of Hongkong Land (HKLD SP, Not Rated) at a cap rate of 3.25%, they are currently valued using a cap rate of 3.75% on KREIT and SUN’s books.

This implies that there could be a revaluation boost from a tighter cap rate. Although book values will be lifted, asset management fees (0.5% of asset value + 3.0% of NPI) paid to its managers will also increase with a negative impact on DPUs.

In theory, the current environment of high asset prices is ideal for asset sales. However, the lack of quality deals in the market today makes it harder to redeploy capital into new properties. Hence, unless a very compelling offer comes along, we doubt management will sell any of its assets.

Furthermore, management is incentivised to grow its AUM; Keppel Capital aims to double its AUM over the next five years.