Koh Wee Lih, the CEO of Keppel REIT’s K71U manager, sees the Singapore office market as “very resilient”, unlike the sector in the US and Europe. Keppel REIT has a diversified portfolio of prime commercial assets in Singapore, Australia, South Korea and Japan. In Singapore, the REIT owns Ocean Financial Centre and has majority stakes in Marina Bay Financial Centre, One Raffles Quay and Keppel Bay Tower.
“[The] office [sector] has been very misunderstood,” says Koh, who was speaking at the Bank of Singapore’s (BoS) Singapore REITs (S-REITs) outlook event on Aug 29. Koh was one of the panellists during the panel discussion. He was joined by Serena Teo, CEO of CapitaLand Ascott Trust HMN ’s (CLAS); Anthea Lee, CEO of Frasers Logistics & Commercial Trust BUOU 's BUOU (FLCT) trustee-manager and BoS’s chief investment strategist, Eli Lee.
He adds that the REIT has seen a “strong demand” for offices in Singapore due to the city-state being a hub for Southeast Asia. The “flight to quality” and “flight to green” trend has been “very real” in the four markets the REIT is in.
Despite Singapore’s very small market size, the country is one of the “natural choices” for multinational corporations (MNCs) to set up their headquarters in.
Furthermore, coming out of Covid-19, MNCs have been shifting from their operations in North Asia to expand or move their premises to Singapore.
This isn’t a surprise to Koh, who notes that Singapore enjoys proximity to the major hubs of Tokyo, Shanghai and Sydney, which are all within a six- to seven-hour flight away.
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In addition, Singapore’s attractiveness as a hub has only increased amid the current geopolitical tensions.
The Urban Redevelopment Authority (URA) has also indicated that they will not be releasing any new parcels of land for offices within the Central Business District (CBD) anytime soon, which has moderated some of the supply situation, Koh points out.
Though there are 2.9 million sq ft of new office space tipped to enter the market in 2024, only IOI Central Boulevard Towers, which is slated to be completed in this year, is located in the CBD. IOI will have 1.26 million sq ft of office space and 30,000 sq ft of retail, food and beverage spaces. The remaining new office spaces will be located in the fringe CBD areas and decentralised locations.
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To be sure, even if URA were to release new office supplies in the CBD, Koh isn’t worried as the introduction of new offices will take “easily” four to five years, including planning and development.
On its other markets, Koh says the REIT still likes Australia as the market is “easy to understand”. After all, Australia is an English-speaking country that shares a similar legal framework as Singapore.
“We’ve also been there for a long time. That’s why I think when the market is still uncertain, we’ve the conviction to pull the trigger to invest,” he notes.
Referring to the not-so-buoyant headlines about the Australian office sector, Koh says the REIT is “seeing different things” on the ground.
For instance, the Sydney CBD itself is subdivided to many segments, of which the REIT is in the core district which outperformed the rest of the city’s sub-segments. One of its buildings, 8 Chifley Square, is fully leased. The REIT bought the asset, a 30-storey Grade A premium commercial building, at a cap rate of 6.5%.
“You can have a debate about where long-term stabilised cap rate for office in Australia should be,” says Koh. “If you think it's in the low 5%, like 5.25%, we are looking at [a] $100 million capital upside, and this [is] just on the capital gains, not forgetting that we will be… earning a 6.5% yield as well.”
In early August, a memo circulated from New South Wales premier Chris Minns’ department, stated that government sector employees were mandated to work in an approved office or related worksite, a move that Koh welcomes. He adds that his team also sees employees returning to the office with the REIT’s tenants and partners having three to four days in the office.
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The infrastructure upgrades in Australia is another key catalyst in Koh’s view. One such upgrade is the new Metro train that will connect Sydney’s Macquarie Park directly to the city, which Koh sees as a “gamechanger”. “[This] will bring positive effect into Aussie office market itself particularly in New South Wales,” he says.
Overall, the REIT is positive on the long-term fundamentals in Australia, with its good resources and good immigration. With white collar jobs continuing to grow, Koh believes there is going to be demand for offices in the country.
As the global economy improves, there will be more demand for such resources, he adds.
“[Our] short-term to medium-, even long-term outlook for Australia is very positive. That's why we have the conviction to invest when the dust is not settled yet,” says Koh. “But again, when the dust is fully settled, things will be fully priced in. You won't get this potential capital outside.”
The Korean market is also performing well, if not better than Singapore, Koh adds, with the occupancy rate in T Tower in Seoul at 100% as at June 30 due to the lack of supply and the back-to-office culture in the country.
‘Position of strength’
Today, Koh sees more opportunities for growth overseas, although the REIT has no plans to go beyond the Asia Pacific (Apac) region and beyond its current markets in the short term.
To him, Keppel has divested well since it listed on the Singapore Exchange S68 (SGX) with just $600 million of assets under management (AUM). Today, the REIT has about $9.6 billion worth of prime quality assets in its portfolio.
“We obviously bought well along the way, but more importantly, we also divested well. We divested out of Bugis Junction in 2019 itself, and also exited from the Brisbane market back in 2021, and that's why we have accumulated quite a sizable kind of capital gains,” he says. “Today, when the market is relatively weak, we come from position of strength, and we're able to give anniversary distributions… to reward [unitholders] for staying with us.”
“So I think that we're very optimistic in all the four markets we are in right now,” he adds. “Ideally, I’d like to buy more in Singapore, but the numbers [are] just very difficult to stack up, because, again, Singapore trades at very tight cap rate, [which is] lower than the borrowing costs itself. So naturally, at this part of the cycle, I think [we are] likely to look to overseas for more growth opportunities.”
On the Monetary Authority of Singapore’s (MAS) move to flatten the aggregate leverage and interest coverage ratio (ICR) structure, Koh applauds the move. “I think it will simplify the whole landscape… this will simplify [the] whole thing [and] make investors easier to understand [the REIT’s metrics],” he says.
“Coming from the recent kind of rate hike, a lot of REITs will be cautious trying to increase their gearing too high for acquisitions. I think for Keppel REIT, we have always been managing our balance sheet well; I think we've always been prudent managing it,” he adds. “So with the recent acquisition, our leverage crossed [the] 40% [mark] but [in the] long term, we hope to stay below the 40% range. [This is] to have a strong balance sheet and also to give ourselves potential headroom to pounce on interesting acquisition opportunities.”
