Keppel Reit to Buy 51% of Keppel South Central for S$610.9 Million With a Five-Year Income Guarantee

The total value of the 33-storey Grade A commercial building in the Central Business District stands at about S$1.2 billion. With 522,500 sq ft of net lettable area, this translates to an overall building valuation of about S$2,350 per sq ft. Based on this valuation, the agreed property value for Keppel Reit’s 51 per cent interest on a 70-year leasehold basis is S$626.2 million. Chua Hsien Yang, chief executive of Keppel Reit Management, said the acquisition increases the Reit’s presence in Singapore to 82 per cent, and reinforces its leading position in a supply-constrained CBD office market that continues to benefit from resilient business demand and limited new supply.

The transaction, which includes the repayment of S$462.1 million in existing shareholder loans, is expected to be completed in the second quarter of next year, subject to unitholders’ approval at an extraordinary general meeting expected in the fourth quarter of this year. The manager said the acquisition offers a pro forma distribution per unit accretion of 2.01 per cent and an “attractive” initial property yield of 4.3 per cent. It intends to fund the purchase through a combination of bank loans, perpetual securities, internal cash and/or equity financing, with post-acquisition aggregate leverage expected at 39.2 per cent.

Had the acquisition and the divestments of T Tower in Seoul and KR Ginza II in Tokyo been completed on 30 June, Keppel Reit’s portfolio occupancy would be 93.9 per cent, with a weighted average lease expiry of 4.5 years. The portfolio would comprise 13 properties with a total value of about S$12.1 billion across Singapore and Australia.

An arrangement with Keppel’s wholly owned subsidiary K-Commercial Investment will provide the Reit with a guaranteed monthly income of S$2.23 million for up to five years, supported by current rents at Keppel South Central. Committed leases and leases in the process of documentation comprised 52.7 per cent of net lettable area at an average rent of about S$11.30 psf per month as at 30 September. That is above the S$11.15 psf per month assumed under the arrangement. The manager said the average rent largely reflects leasing activity on the mid-to-high floors, with potential for higher rents from the remaining available space on the lower-to-mid floors. As at 15 October, committed leases and leases in the process of documentation had increased to about 60 per cent.

Investment bank Jefferies maintained a “hold” on Keppel Reit after the deal was announced, and kept its target price at S$0.85. Its analysts said they like the redeployment of proceeds from lower-yielding Japan and South Korea divestments into a higher-yielding Singapore asset. However, they said potential equity fundraising could create a near-term overhang, while the income support structure may raise questions around the asset’s underlying earnings yield before stabilisation. Units of Keppel Reit closed down 4.9 per cent, or S$0.04, at S$0.78 on Tuesday.