Keppel Reit to acquire Grade A office building in Sydney for A$327.7m

KEPPEL Reit's K71U : K71U 0%wholly-owned subsidiary has entered into an agreement to acquire and develop a Grade A freehold office building in Sydney, Australia for A$327.7 million (S$322.2 million).

The acquisition is targeted to be completed by the end of 2021, with practical completion of the development estimated in mid-2023.

Upon practical completion of the property, Keppel Reit's assets under management will grow to S$9 billion across 11 properties in Singapore, Australia and South Korea, said the Reit manager in a bourse filing on Tuesday (Nov 30).

The proportion of freehold assets in Keppel Reit's portfolio will also increase to 32.6 per cent from 30.1 per cent by net lettable area.

Assuming the transaction was completed on Jan 1, the FY2020 distribution per unit (DPU) after the transaction would be 5.90 Singapore cents, from 5.73 cents before the transaction, according to pro forma estimates. (see amendment note)

The building, Blue & William, sits at the prime intersection of 2-4 Blue Street and 1-5 William Street and is 160 metres away from the North Sydney train station.

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With the upcoming Victoria Cross metro station, located about 350 metres from where the building is located, commuting time to Barangaroo and Martin Place in the Sydney central business district (CBD) will be reduced to approximately 3 and 5 minutes respectively, the Reit manager said.

The property has a total net lettable area of about 14,000 square metres. It will feature outdoor terraces overlooking the Sydney Harbour Bridge, as well as an on-site cafe and end-of-trip facilities.

A 3-year rental guarantee will be provided by the developer on any unlet space after practical completion.

The Reit manager will finance the transaction with Australian dollar denomination loans for natural hedge, with progressive payments to be made based on construction milestones.

Assuming the acquisition was completed on Sep 30, 2021, Keppel Reit's aggregate leverage will be approximately 39.9 per cent, from 37.6 per cent before the transaction, based on pro forma estimates.

The manager said the investment will see Keppel Reit expand strategically into North Sydney, a major commercial district with positive leasing dynamics.

It noted that North Sydney is New South Wales' second-largest office market after the Sydney CBD, and that notwithstanding the pandemic, it recorded its third consecutive quarter of positive leasing demand in Q3 2021.

"In line with the manager's active portfolio optimisation strategy, this DPU-accretive investment brings in an initial net property income yield of 4.5 per cent, which will enhance Keppel Reit's overall portfolio returns," said the manager.

"At the same time, regular coupon will be received from the developer throughout the development phase, providing robust risk-adjusted returns."

Units of Keppel Reit were trading S$0.01 or 0.9 per cent higher at S$1.12 as at 9.01 am on Tuesday.

Amendment note: An earlier version of this article incorrectly stated Keppel Reit’s FY2020 DPU after the transaction would be 5.90 Australian cents. It should be 5.90 Singapore cents.