A quick rebound from its sell-off last week might suggest investors are prepared to stomach some DPU dilution for the right deal at the right time

 

[SINGAPORE] It has been a pretty good year for Singapore-listed real estate investment trusts (S-Reits), with softening interest rates and bullish market sentiment enabling some of the leading players in the sector to actively tap investors and expand their property portfolios.

 

Keppel Reit&rsquo s latest deal, however, could be something of a gamble on the sensibilities of S-Reit investors, and an interesting test of the limitations of these asset securitisation structures. 

 

On Thursday (Dec 11), Keppel Reit&rsquo s manager called for a trading halt and announced that it will acquire a one-third interest in Marina Bay Financial Centre (MBFC) Tower 3 from a unit of   Hongkong Land   : H78 0% at an agreed property value of S$1.45 billion.

 

To partially finance the deal,   Keppel Reit   : K71U 0% has launched a 23-for-100 preferential offering of 923.2 million new units at S$0.96 each &ndash a 6.8 per cent discount to its closing price of S$1.03 on Wednesday. Keppel Reit is scheduled to trade ex-preferential offering on Dec 19.

 

Here&rsquo s the thing: The pro forma financial numbers provided by Keppel Reit&rsquo s manager do not suggest that the deal will have an immediate positive impact on its distributions per unit (DPU). 

 

In fact, if Keppel Reit&rsquo s purchase of the additional one-third stake in MBFC Tower 3 had been completed at the beginning of 2024, and assuming a blended debt cost of 3.3 per cent, its DPU for the year would have been 6.4 per cent lower. 

 

Assuming a more favourable blended debt cost of 2.2 per cent, its DPU for 2024 would still have been reduced by 3.6 per cent. 

 

Will S-Reit investors support an acquisition that is not at least marginally accretive to DPU? What would it mean for the S-Reit sector if they did?

 

Seizing an opportunity

There are a number of good reasons for Keppel Reit to acquire a further one-third stake in MBFC Tower 3, despite the likely dilutive impact on its DPU. 

 

The deal will expand the size of Keppel Reit&rsquo s property portfolio, from S$9.8 billion to S$11.2 billion, and increase its exposure to Singapore&rsquo s prime office sector, from 75.8 per cent to 79 per cent. 

 

Citing research from major property consulting firms, Keppel Reit&rsquo s manager said last week that average vacancy rates at Grade-A office properties in the Central Business District (CBD) fell to 5.1 per cent in the third quarter of 2025, from 6.6 per cent the same period a year earlier. 

 

It also noted that no new office projects are expected in the Marina Bay area between 2026 and 2029, and that the government has not recently released land for office developments in the CBD.

 

With tightening supply of prime office space in the CBD, rents will probably rise over the next few years.

 

The opportunity for Keppel Reit to acquire a further one-third interest in MBFC Tower 3 against this positive backdrop only arose because Hongkong Land was contractually obligated to offer its stakes in some of its key properties to its partners before transferring them to a fund.

 

Hongkong Land said last week that its first private real estate fund &ndash dubbed the Singapore Central Private Real Estate Fund &ndash will have assets under management of S$8 billion at inception. 

 

The fund will focus solely on managing prime commercial properties in Singapore, and it is expected to be seeded by assets from Hongkong Land and other sources.

 

Hunt for yield

Over the years, Keppel Reit has expanded across asset classes and geographies to gain heft and resilience. 

 

Besides Singapore, it has exposure to office properties in Australia, South Korea and Japan. Earlier this year, it also acquired a 75 per cent stake in the Top Ryde City Shopping Centre, a freehold retail mall in Australia. 

 

This diversification would have been appealing to income-focused investors. The prime office properties in Singapore that form the core of Keppel Reit&rsquo s portfolio tend to be valued at relatively low capitalisation rates. As the deal its manager announced last week demonstrates, it is tricky to acquire such assets on terms that would be immediately accretive to DPU.

 

Acquiring higher-yielding commercial properties in foreign markets such as Australia makes it easier to immediately deliver the higher DPUs many S-Reit investors crave.

 

Yet, investors are clearly sensitive to risk, too. S-Reits that are focused on commercial properties in Singapore tend to trade at higher valuations than S-Reits with faraway assets. The backing of a well-resourced, Singapore-based sponsor group can also make a big difference. 

 

  CapitaLand Integrated Commercial Trust   : C38U 0% &ndash the largest of the S-Reits, with a property portfolio that is roughly 95 per cent exposed to Singapore &ndash is currently trading at an annualised H1 2025 DPU yield of 4.8 per cent, and 1.09 times its net asset value (NAV). 

 

The lesser known   Stoneweg Europe Stapled Trust   : SET 0% &ndash which has no assets in Singapore &ndash is trading at an annualised H1 2025 DPU yield of 8.2 per cent, and 0.78 times NAV.

 

Meanwhile, Keppel Reit&rsquo s units are trading at an annualised H1 2025 DPU yield of 5.7 per cent, and 0.78 times NAV.

 

So, will its further investment in MBFC Tower 3 draw applause from the market? Or, will concerns about the DPU dilution weigh on its units?

 

Dipping on dilution

When Keppel Reit&rsquo s trading halt was lifted on Friday, its units suffered a significant sell-off. They ended the day 6.8 per cent lower &ndash at S$0.96. 

 

Even if Keppel Reit&rsquo s units were to dip further this week, the preferential offering at S$0.96 per share would not be scuppered. About 37.3 per cent of Keppel Reit&rsquo s units are held by entities under the Keppel group, all of which have provided irrevocable undertakings to subscribe and pay for their respective entitlements. 

 

  DBS   : D05 0%,   OCBC   : O39 0% and   UOB   : U11 0% &ndash which have been appointed joint bookrunners and joint underwriters &ndash will mop up any unsubscribed entitlements of the other unitholders. 

 

Yet, it would not be a good look if the market price of Keppel Reit&rsquo s units were to fall significantly below the preferential offering price for an extended period of time. In my view, that would be a clear signal that DPU dilutive deals are simply unacceptable to S-Reit investors.

 

The upshot would be that Keppel Reit, and its S-Reit peers, will have to confine themselves in the future to acquiring assets that have the potential to deliver immediate DPU accretion. This would leave them with a narrower range of options to expand their property portfolios. 

 

If Keppel Reit were to quickly rebound, however, it might suggest that S-Reit investors are prepared to look past temporary DPU dilution for the right deal at the right time &ndash and embolden S-Reit managers to seize opportunities.

 

Despite the sell-off last week, Keppel Reit is still among the 10 best performing constituents of the iEdge S-Reit Index in 2025. With distributions re-invested, it has chalked up a total return of 19.4 per cent since the beginning of the year, versus the index&rsquo s total return of 14.4 per cent.

Unitholders entitled to 23 units for every 100 existing units at S$0.96 each acquisition to affect DPU

 

[SINGAPORE]   Keppel Reit   : K71U 0% has agreed to acquire an additional one-third interest in Marina Bay Financial Centre (MBFC) Tower 3 for an agreed property value of S$1.45 billion, the manager of the Reit announced on Thursday (Dec 11). 

 

The seller is Sageland, a subsidiary of Hongkong Land. 

 

To fund the acquisition, the real estate investment trust (Reit) has launched an underwritten non-renounceable preferential offering to raise gross proceeds of around S$886.3 million.

 

DBS, OCBC and UOB have been appointed as the joint bookrunners and underwriters for the offering.

 

Upon completion of the deal, expected on Dec 31, Keppel Reit&rsquo s interest in the property will increase to two-thirds.

 

The Reit had acquired its initial one-third interest in the property from its sponsor, Keppel Land. The remaining one-third stake in the tower is held by DBS.

 

Preferential offering

Under the preferential offering, entitled unitholders will be offered 23 new units for every 100 existing units held. The issue price is fixed at S$0.96 per new unit.

 

This issue price represents a discount of around 6.8 per cent to the volume weighted average price of S$1.0301 per unit for all trades on the Singapore Exchange on Wednesday.

 

The offering is expected to open on Dec 26 and close on Jan 9. The new units are expected to be listed on Jan 19.

 

About S$875.6 million, or 98.8 per cent of the gross proceeds, will be used to partially finance the acquisition. The remaining amount will be used to pay estimated fees and expenses incurred in connection with the offering.

 

Rationale and outlook

The manager described the acquisition as a &ldquo strategic opportunity&rdquo to deepen the Reit&rsquo s presence in Singapore&rsquo s Central Business District. 

 

Post-completion, Keppel Reit&rsquo s portfolio exposure in Singapore will increase from 75.8 per cent to 79 per cent. The enlarged portfolio value will rise to about S$11.2 billion.

 

Chua Hsien Yang, chief executive of the manager, said: &ldquo The exercise of our pre-emptive right to acquire the incremental one-third share of MBFC Tower 3 presents a rare opportunity to increase our interest in an iconic asset in the prime Marina Bay area, with potential for future rental upside and capital appreciation over the long term.&rdquo

 

The manager cited strong office market fundamentals in Singapore, including improving occupier confidence, cooling inflation and easing global macro uncertainty in its positive outlook. 

 

It also noted that there are no new office projects expected in the Marina Bay area between 2026 and 2029, which could result in a &ldquo prolonged drought&rdquo of new supply, potentially supporting rental growth.

 

Financial impact

The manager provided pro forma financial figures, calculating the impact as if the acquisition and offering had been completed retrospectively on Jan 1, 2024.

 

Based on this illustrative scenario, the transaction would be dilutive to distribution per unit (DPU). The pro forma DPU for FY2024 would drop from an adjusted S$0.0472 to between S$0.0442 and S$0.0455. 

 

This represents a dilution of about 3.6 to 6.4 per cent, depending on interest costs and tax transparency outcomes assumed in the simulation.

 

Ownership background

MBFC was originally jointly developed by a consortium comprising Hongkong Land, Keppel Land and Cheung Kong.

 

Following the development&rsquo s completion, Keppel Reit acquired its initial one-third interest in the property from its sponsor, Keppel Land. The remaining one-third stake, currently held by anchor tenant DBS, was acquired from Cheung Kong&rsquo s share of the building.

 

The Business Times reached out to Hongkong Land for more details on the rationale of its divestment. Hongkong Land responded that it would soon be making an announcement.