In his 2019 National Day Rally address, Prime Minister Lee Hsien Loong announced Singapore’s plans to redevelop the Greater Southern Waterfront (GSW).
Under the plans, the GSW will be transformed into a major gateway for commercial and residential purposes.
Keppel REIT (SGX: K71U) has announced the acquisition of Keppel Bay Tower, located at HarbourFront in the GSW area.
The acquisition will expand Keppel REIT’s portfolio to include quality CBD-fringe office space.
Subject to approval by unitholders, Keppel REIT will acquire the property for S$657.2 million.
The acquisition is expected to be completed in the second quarter of 2021, and will be funded by a combination of debt and equity financing.
Keppel Bay Tower is a Grade A office building with a high committed occupancy of 99.2%.
It is the first commercial building to be powered fully by renewable energy and won the ASEAN Energy Award for efficient energy buildings in 2018.
The 18-storey tower uses intelligent building control systems to reduce energy usage and carbon emissions.
Located next to VivoCity and HarbourFront Centre, Keppel Bay Tower is also well-connected to the CBD by expressway and public transport, with further improvements to come by 2025.
The acquisition will expand the REIT’s non-CBD assets to 11% of its portfolio, up from 3.9% before.
It allows the REIT to offer CBD-fringe alternatives to businesses seeking a secondary office location outside the CBD.
The city-fringe submarket has proven to be resilient throughout the COVID-19 pandemic, with rents only declining slightly by 1.5% in the first nine months of 2020.
For the HarbourFront/Alexandra area in particular, Keppel REIT expects a limited supply of Grade A office stock to sustain the growth of the submarket.
The redevelopment of the GSW should also bolster the attractiveness of Keppel Bay Tower to potential tenants.
If the acquisition is completed, Keppel Bay Tower would be Keppel REIT’s fourth-largest asset and expand Keppel REIT’s portfolio by 7%.
Post-acquisition, Keppel Bay Tower will form 7.4% of the REIT’s portfolio by assets under management (AUM).
The deal also reduces the REIT’s exposure to its largest asset, Marina Bay Financial Centre, from 35.8% to 33.2%.
Keppel Bay Tower also possesses a well-diversified tenant mix, with 29 tenants from a wide variety of industries.
Some of the present tenants include established blue-chips like Keppel Corporation (SGX: BN4), BMW (ETR: BMW) and Mondelez International (NASDAQ: MDLZ).
Keppel Corporation will enter the REIT’s list of top ten tenants, at 3.7% of net lettable area (NLA).
The REIT will also reduce exposure to any single tenant from 11.3% to 9.3%, thereby enhancing income diversification.
DPU and NPI accretive
Unitholders of Keppel REIT can rejoice at the expectation of higher distributions.
The target property has a net property income (NPI) yield of 4%, higher than the REIT’s existing Singapore portfolio NPI of 3.2%.
Based on pro-forma estimates, DPU would have risen by 2.9% in the first half of 2020, had the acquisition been completed on 1 January 2019.
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Disclosure: Herman Ng does not own shares in any of the companies mentioned.