Overview of Keppel REIT

Keppel REIT (KREIT SP) has emerged as one of the most prominent real estate investment trusts (REITs) in Singapore, boasting a robust portfolio primarily focused on Grade-A office assets. The REIT has a total asset under management (AUM) of SGD9.0 billion, with an 80% exposure to Singapore’s Grade-A office market and a significant tenant base comprising financial institutions (28% of net lettable area).

As of 2H24, Keppel REIT reported a distribution per unit (DPU) of SGD2.8 cents, which was flat compared to the prior half-year period but marked a 3.4% year-on-year decline. The REIT maintained high committed occupancy levels at 97.9% and achieved a strong rental reversion of 13.2% during the period. However, elevated borrowing costs have exerted pressure on distributable income.

Operational Performance

Keppel REIT recorded a gross revenue of SGD136.5 million in 2H24, reflecting a growth of 9.1% half-on-half (HoH) and 15.5% year-on-year (YoY). Net property income (NPI) for the same period stood at SGD105.1 million, growing by 8.6% HoH and 13.6% YoY.

The revenue increase was driven by contributions from the completion of 2 Blue Street, the acquisition of 255 George Street, and improved revenue from T Tower and KR Ginza II. These contributions offset weaker income from Ocean Financial Centre (OFC) and 8 Exhibition Street. Portfolio valuation declined marginally by 0.2% due to expanding capitalization rates in Australia and adverse foreign exchange movements.

Capital Management

Keppel REIT’s gearing ratio remained stable at 41.2% compared to 41.9% in 3Q24. The cost of debt edged up slightly to 3.4%, while interest coverage fell from 2.7x to 2.5x. Management has guided for debt costs to remain in the mid-3% range.

The REIT’s disciplined capital management has been a cornerstone of its strategy. It aims to maintain financial flexibility through a proactive approach to refinancing and hedging, with 69% of its debt fixed-rate hedged.

Geographic Performance

Singapore

Occupancy in Singapore’s portfolio stood at a robust 98.8%, supported by strong demand in the Grade-A office market. Net property income in Singapore rose marginally by 2.1% YoY to SGD254.6 million in FY24.

Australia

Australia’s portfolio saw a notable improvement, with occupancy rising to 96.1% and net property income growing by 16.6% YoY to SGD99.2 million in FY24. This growth was bolstered by contributions from new acquisitions and rental escalations.

North Asia

North Asia, including assets in South Korea and Japan, contributed positively with a 30% YoY increase in income to SGD14.6 million in FY24. Occupancy in the region remained at a perfect 100%.

Forward Guidance and Investment Recommendation

Maybank Research has maintained a BUY recommendation for Keppel REIT, with a revised target price of SGD1.00, down from SGD1.05. The revision reflects the absence of rental support and lower income contributions from Australian assets in FY26 estimates. Despite potential risks from large lease renewals and rising interest rates, the REIT’s portfolio of below-market expiring rents and attractive valuations underpin its investment appeal.

Key risks include dilutive capital raising, hybrid work trends impacting office demand, and rising borrowing costs. However, the REIT’s disciplined capital management and high-quality assets in gateway cities position it well for the future.

Environmental, Social, and Governance (ESG) Initiatives

Keppel REIT has made significant strides in ESG efforts. Nine of its 11 properties are green-certified, with all Singapore assets achieving BCA Green Mark Platinum status. The REIT aims to have all its properties green-certified by FY23, supported by initiatives to reduce Scope 1 and 2 emissions by 50% by 2030 and increase renewable energy usage by 40%.

On the governance front, the REIT is managed by Keppel Capital, with a high degree of board independence—four out of seven members are independent. The management fee structure is competitive, and the REIT has consistently maintained a 100% payout ratio for taxable income, exceeding the 90% regulatory threshold.

Conclusion

Keppel REIT continues to demonstrate resilience amid a challenging macroeconomic environment. While higher borrowing costs and hybrid work trends pose challenges, its strong asset base, proactive capital management, and commitment to sustainability provide a solid foundation for future growth.

Investors seeking exposure to Grade-A office assets in prime locations should consider Keppel REIT, given its attractive valuation, stable yield profile, and strategic management. The recommendation to BUY reflects confidence in its ability to navigate headwinds and deliver long-term value.