3 Reasons Why Keppel REIT’s Entry into Japan is Positive for Investors

December 12, 2022

Office-focused Keppel REIT (SGX: K71U) owns 11 properties worldwide; four in Singapore, six in Australia and one in South Korea.

Recently, Keppel REIT has made its maiden entry into the Japanese market following the announcement to acquire a 98.47% effective interest in a freehold boutique office building in Ginza, Japan, for JPY 8.83 billion (S$84.4 million).

The property has eight storeys of office space and a retail unit on the ground floor.

It’s located in the Ginza district within Chuo ward, one of Tokyo’s core three wards and home to big Japanese corporations such as Bank of Japan and the Tokyo Stock Exchange.

So, for investors, here are three reasons why Keppel REIT’s entry into the Japan market is positive.

1. Tokyo has the largest CBD office market in Asia

The acquisition of the property, Ginza 2-chome, is positive as Tokyo has the largest central business district (CBD) office market in Asia, which is 2.6 times larger than Singapore’s office market.

It is also leading in office investment volume in Asia Pacific with a transaction value of US$15.6 billion in 2021.

With the acquisition, this will enhance the visibility of Keppel REIT in the Japanese market, allowing Keppel REIT to further expand in Japan.

2. Japan’s low interest rate environment

The acquisition will be fully funded with yen-denominated borrowings.

Given Japan’s low interest rate environment, this provides an attractive net property income (NPI) yield spread.

When fully leased, the property is expected to have an NPI yield of 3.1% and will boost distribution per unit (DPU) by 0.5%.

Following the acquisition, the REIT’s aggregate leverage will be approximately 39.0%. This is still below the 45% ceiling level.

Its assets under management (AUM) will come in at around S$9.0 billion, across 12 properties in four countries.

3. Diversifying its asset base

Keppel REIT has strong exposure to properties in Singapore and Australia.

With the expansion into Japan, this will help the commercial REIT to strengthen its geographical and income diversification.

This will also help to provide greater stability in the long-term for investors.

Keppel REIT has attractive dividend yield

Even before the expansion into Japan, Keppel REIT had a solid financial performance as it benefitted from the rise in office rents.

In fact, Singapore office rents in Q3 2022 have reached a 14-year high, exceeding the pre-pandemic peak.

This has helped Keppel REIT’s NPI to grow by 2.5% year-on-year (yoy) to S$132.6 million, during the first nine months of 2022.

The higher NPI has also resulted in an increase of 3.4% yoy in its distributable income to S$165.4 million.

In H1 2022, Keppel REIT’s DPU increased by 1.0% yoy to 2.97 Singapore cents.

As of 30 September 2022, Keppel REIT’s portfolio committed occupancy rate stood at 96.8%, an increase from 95.5% at the end of June 2022.

With a potential increase in DPU following the acquisition of Ginza 2-chome, investors looking for higher distributions should have Keppel REIT on their investment radar.

Based on its current share price, Keppel REIT also offers an attractive 12-month forward distribution yield of 6.6%.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.

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