4 factors driving up demand for Keppel REIT prime offices

See what's boosting tenant take-up.

According to Barclays Research's latest comment on Keppel REIT, the property trust's prime offices have seen occupier demand stemming from: a) commodity and energy firms, such as BHP Billiton and Rio Tinto, due to the Singapore government granting tax breaks; b) the liberalisation of the legal sector; c) expansion of existing tenants, especially the insurance companies; and d) tenants moving from fringe locations.

Barclays also noted that tenants are increasingly asking to lock in longer leases (eg. 6 years vs 2-3 years) to avoid significantly higher reversions by 2016.

It has also helped that Keppel REIT that 1.7m sqft of Grade B/ C older buildings have been converted into residential and hotels, reducing the impact of shadow space.

Barclays warns though that income support for Keppel REIT could be falling off.

MBFC 1 passing rent is now S$9.80/sqft/mth, close to the support of S$10; OFC’s passing rent is now close to S$9/sqft/mth, while still some way from support level of S$12.50-13.00/sqft/mth, its anchor tenants, ANZ and BNP, signed at low single-digit rates and should revert to market rates in 2015 and 2016 when the leases are up for review and would revert to market. In 1Q13, >100,000 sqft of its ORQ space was renewed at S$9.60-10.50/sqft, an average of 70% above preceding rents, with no incentives given.

Barclays also said that even though the MBFC Phase 2 is now 88% leased, the timing of the acquisition from KepLand is still uncertain.

"Management believes that the S$1.1-1.2bn acquisition could be partially funded by an asset swap (by divesting an older asset that would reduce the overall age of its portfolio) or even if it has to raise equity, the impact is now much smaller on its now-larger asset base of cS$7bn vs 2-3 years ago," said Barclays.