Keppel DC REIT: Sustainable Growth in Singapore, Green Shoots in China
UOB Kay Hian | 20 March 2025
Tight Supply Bolsters Singapore’s Colocation Data Center Market
The Singapore data center market remains supply-constrained, with the tight vacancy expected to persist into 2025 and 2026. In July 2023, the Infocomm Media Development Authority (IMDA) awarded 80MW in capacity to four data center operators – Equinix, GDS, Microsoft, and the AirTrunk-ByteDance Consortium. However, only Equinix and GDS have recently acquired land for new facilities.
Equinix’s upcoming 20MW SG6 data center is expected to commence operations in 1Q27, while GDS’s redevelopment of 21 Jalan Buroh is slated for completion in 4Q26. This means the small increase in new supply will largely come on stream in 2027, allowing the recent upsurge in positive rental reversion for colocation leases in Singapore to sustain into 2025 and 2026.
Accretive Acquisitions and Divestments
Keppel DC REIT (KDCREIT) completed the acquisition of 99.49% economic interest in SGP7 and SGP8 data centers on 27 December 2024. Designed for AI inference workloads, these two facilities are expected to provide a net property income yield of 6.5-7.0% and contribute positively to KDCREIT’s distribution per unit (DPU) from 1H 2025 onwards.
Meanwhile, KDCREIT has entered into an agreement to divest its Kelsterbach Data Centre in Frankfurt, Germany for €50.0 million (S\$70.6 million), representing a 28% premium to its valuation. This divestment is in line with KDCREIT’s renewed focus on hyperscale data centers and will strengthen its balance sheet.
China’s Data Center Segment Shows Green Shoots
KDCREIT is working with its tenant, Bluesea Development, to execute a recovery roadmap for the Guangdong DC1 and DC2 data centers. Occupancy for these facilities is currently at 30%, but KDCREIT has received more inquiries from prospective tenants. Management expects actual lease signings to materialize in 2026.
Despite the challenges, KDCREIT believes the valuation for its China data centers will remain stable. The existing rents are below market rates, and the implied cap rate for these assets is above the 7.7% cap rate used in the recent spin-off of GDS Holdings’ China data centers into a private REIT.
Outlook and Valuation
- Maintain BUY rating with a target price of S\$2.55, based on a discounted cash flow (DCF) valuation with a cost of equity of 7.0% and a terminal growth rate of 2.5%.
- The strong positive rental reversion for colocation data centers in Singapore is expected to extend into 2026, while the provisions for the Guangdong data centers are likely to continue into 1H 2026.
- KDCREIT remains focused on scouting for acquisition opportunities, particularly in its preferred markets of Japan, South Korea, and Europe, to capitalize on the structural trends in the data center industry, such as the growth of generative AI.
