SINGAPORE (Feb 28): Efficient access to Asia’s Capital has established Singapore as an international hub for the listing and trading of international REITs. With the foundation of a favourable tax regime and well-established legal system, Singapore was the largest global REIT IPO platform in 2019.
While dividends have a history of attracting investors to the REIT market, the ability for a REIT to raise secondary funds to facilitate portfolio growth is also important. Portfolio growth can also benefit unitholders through asset price appreciation, with the converse also applying to prices when portfolios contract. Last year also saw a record year for REIT secondary fundraising activity in Singapore, mostly to facilitate property acquisitions.
REITs for dividends and growth?
For investors, Keppel DC REIT has generated more return in unit price appreciation than combined dividend distributions since its IPO. The initial offer price for the Keppel DC REIT units was 0.93 cent per unit. The REIT closed on Feb 21 at a unit price of $2.52.
Keppel DC REIT’s initial portfolio comprised eight assets across six countries with a value of $1.0 billion. From the time of its IPO, on Dec 12, 2014, to the end of 2019, the portfolio grew to 17 assets across eight countries with a portfolio value of $2.6 billion.
Keppel DC REIT expanded its presence in Singapore in 2019 with the strategic additions of Keppel DC Singapore 4 and DC1. This increased the REIT’s portfolio value by 30% from the $2-billion mark at the end of 2018. The CAGR of the portfolio value through to the end of 2019 was 21%. Similarly, the annualised total return of the REIT in terms of price return was 22% from IPO through to Feb 21, 2020.
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On Dec 12, 2019, Keppel DC REIT entered into a sale and purchase agreement to acquire 100% freehold interest in a shell and core purpose-built data centre facility in Kelsterbach, Germany. The acquisition is expected to be completed this year.
Data centre comeback of 2019
Keppel DC REIT was the best performing REIT in Singapore, in both the 2020-year through to Feb 21, and for last year. Note these total returns include price moves and dividend distributions and assumes that the dividends were reinvested.
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The strategic additions of Keppel DC Singapore 4 and DC1 saw the REIT raise $478 million in gross proceeds through a fully underwritten private placement and preferential offering. The private placement, which was nine times covered, was fully covered within the first hour.
Back in 2018, however, Keppel DC REIT generated a 1% decline in total return. According to NAREIT, in 2018, data centres had their weakest year since NAREIT had included them into sub sector returns at the beginning of 2015. Equinix Inc, the leading global data centre provider in terms of market share, also generated a 19% decline in total return in 2018.
According to JLL, investors then were concerned about potential oversupply in key US markets, as well as expensive and dilutive M&A deals resulting in capital-intensive campuses and locations, coupled with a lag in occupancy.
Then in 2019, both Keppel DC REIT and Equinix generated similar SGD total returns of 66% and 67% respectively. For the FY2019 ended December, Keppel DC REIT grew its gross revenue by 11% from FY2018. Similarly, for its FY2019 ended December, Equinix increased its annual revenue by 10% from FY2018.
At the end of 2019, Equinix was ranked the fourth largest REIT by market capitalisation, up from the sixth largest REIT by market cap at the end of 2018. As of the end of 2019, Equinix also maintained total assets of US$23.97 billion ($33.5 billion), with total liabilities of US$15.13 billion. In comparison, Keppel DC REIT, maintained total assets of $2.93 billion with total liabilities of $1.03 billion at the end of 2019.
Industry drivers
In August 2019, property consultants Cushman & Wakefield ranked Singapore as the third most robust data centre market across a global ranking of 38 countries, in addition to the top market in Asia Pacific and the sole mature data centre market in Asean.
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When announcing it would invest US$85 million to build its fourth data center in Singapore in January 2019, Equinix cited one of its market studies that estimated Singapore’s interconnection bandwidth capacity is expected to more than quadruple by 2021, reaching 394Tbps at a CAGR of 47%.
In its outlook, Keppel DC REIT has identified industry drivers for data centres including ongoing industry digitalisation and cloud deployment. In January, Gartner contributor, Meghan Rimol, highlighted that cloud computing is firmly established as the new normal for enterprise IT, and across industries, cloud has continued to be one of the fastest-growing segments of IT spend.
Aside from the growing cloud infrastructure market, Keppel DC REIT emphasise that improved connectivity as well as the development and adoption of new technologies will continue to drive the growth of data creation and fuel demand for data storage requirements in key data centre hubs globally. According to a Cisco report, 5G connections will generate 2.6 times more traffic than the average 4G connection, and take up 12% of total mobile traffic by 2022.
Geoff Howie is market strategist at the Singapore Exchange.
