Keppel Reit’s manager remains optimistic on Singapore office in 2024 even as H2 DPU slips 1.7%

THE manager of Keppel Reit remains optimistic regarding its Singapore office segment this year, with expectations for continued positive rental reversions from its local portfolio.

“We remain confident and optimistic on the Singapore office market outlook, at least for our portfolio,” Koh Wee Lih, chief executive of the manager said during an earnings briefing on Tuesday (Jan 30).

The Reit reported higher property income for both the second half and full year ended December 2023, but distributions slipped slightly during the year amid higher borrowing costs.

Portfolio rental reversion for the Reit’s Singapore portfolio stood at 9 per cent for FY2023 and 11.3 per cent during the fourth quarter, the manager said.

The average signing rent for its Singapore office leases in FY2023 was S$12.41 per square foot (psf) per month, supported by “healthy demand from diverse sectors for prime office space”.

Meanwhile, the average expiring rents of Keppel Reit’s Singapore office leases expiring in 2024 and 2025 are S$11.19 and 11.13 psf per month respectively.

Keppel Reit’s portfolio has a large lease expiring in 2024, which Koh noted was signed quite a while back. He said: “We expect this to capture a significant positive rental reversion with the renewal of this lease.”

While there is new supply coming on the market this year, such as IOI Central Boulevard Towers, Keppel Reit – which has a stake in properties such as Ocean Financial Centre, Marina Bay Financial Centre and One Raffles Quay – still sees good demand in the market.

“I think the market has grown to be able to absorb that supply coming into the Central Business District area itself, so we again continue to remain optimistic for both the 2024 and 2025 rental outlook,” Koh said.

The manager is expecting positive reversion in the mid-to-high single digits this year.

Keppel Reit’s distribution per unit (DPU) fell 1.7 per cent to S$0.029 for the second half of FY2023, compared with S$0.0295 a year ago.

This came as distributable income from operations fell 0.7 per cent to S$99.7 million for the half year, after borrowing costs rose 8.3 per cent to S$35.2 million. The Reit also paid S$10 million in anniversary distribution in H2 2023, bringing distribution to unitholders to S$109.7 million.

Meanwhile, property income for the period rose 7.9 per cent to S$118.2 million, driving net property income to increase 7 per cent to S$92.5 million despite higher property expenses. This was mainly due to higher rentals and occupancy for the Singapore properties.

For the whole financial year, DPU was 2 per cent lower at S$0.058. Distributable income from operations dropped 5.8 per cent to S$198.7 million. The manager noted that the lower distribution to unitholders was mainly due to higher borrowing costs, which rose 16 per cent on year to S$67 million.

Including the anniversary distribution of S$20 million, distribution to unitholders for the full year stood at S$218.7 million in FY2023. This was down from S$220.9 million in FY2022 when the Reit had an anniversary distribution of S$10 million.

Property income for the year rose 6.3 per cent to S$233.1 million, leading net property income to increase 3.7 per cent to S$182.4 million.

On portfolio performance, the manager noted a positive rental reversion of 9.9 per cent for the overall portfolio in FY2023 and a higher committed occupancy rate of 97.1 per cent, versus 95.9 per cent as at the end of September. The portfolio weighted average lease expiry stood at about 5.5 years as at Dec 31.

The manager also highlighted that its Australian portfolio continued to register higher occupancy. Full occupancy was achieved at 8 Chifley Square while committed occupancy at 2 Blue Street stood at 66.4 per cent, as compared to 42.5 per cent at the end of September.

It added that its Singapore portfolio and South Korea property recorded occupancy rates of 99 per cent and 95.8 per cent respectively.

Portfolio valuation of all investment properties as at the end of December rose 0.8 per cent compared to end-June. Keppel Reit’s Singapore assets recorded a 1 per cent increase in their valuations, while its Australia portfolio had a slight decline in valuations amid an increase in cap rate.

Koh noted that the Reit is open to capital recycling across its portfolio, but added it is unlikely it would come from Singapore.

“Singapore continues to perform well…and we like to continue to enjoy the positive rental reversion coming from the Singapore portfolio.”

As at Dec 31, the Reit’s aggregate leverage was 38.9 per cent with 75 per cent of the borrowings on fixed rates. Interest coverage ratio stood at 3.4 times. Weighted average term to maturity of borrowings was 2.4 years.

“The majority of the debt due in 2024 will mature in Q2 2024, for which refinancing discussions with the respective lenders are in progress,” said the manager, noting that the Reit has access to more than S$1.2 billion borrowing facilities to meet funding requirements.

The Reit had an all-in interest rate of 2.89 per cent per annum in 2023, and the manager expects this to rise in 2024 to around 3.5 per cent per annum.

The distribution for the second half will be paid out on Mar 15, after the record date on Feb 7.

Units of Keppel Reit were trading at S$0.91 as at 3.58pm on Tuesday, up 1.7 per cent from the previous close.