One of Singapore’s largest companies by market capitalisation will look vastly different by year-end. With the sale of Keppel Offshore & Marine (O&M) to Sembcorp Marine in February and a “major reorganisation” unveiled in May, the stage is set for Keppel Corp’s BN4 transformation from a conglomerate to a global alternative real asset manager.
Founded in 1968 as Keppel Shipyard, the Keppel of today is shedding weight as part of the group’s Vision 2030 strategy, which was unveiled at the peak of the pandemic in May 2020. In July 2022, Keppel divested its logistics business — a “non-core business that has been operating at a sub-scale level”, says Thomas Pang, CEO of Keppel Telecommunications & Transportation.
On the other hand, Keppel is beefing up its asset management capabilities, as it simplifies its group structure to form a “horizontally integrated model” comprising fund management, investment and operating platforms — three parts of one integrated business focused on “investing in and creating solutions for a sustainable world”, according to management.
Loh Chin Hua, CEO of Keppel Corp, says the restructuring reflects a “fundamental shift” to operate in a “nimbler manner” and harness technology to grow at speed and scale.
Over 12 to 18 months from May, Keppel will re-examine its organisational and legal structure, as well as data-sharing practices within the group.
Loh also promises “closer alignment of management incentives with group-level performance and the interests of shareholders”, which include investors in the funds, REITs and the business trust that Keppel manages.
See also: Sale of offshore and marine unit lifts Keppel Corp's 1HFY2023 earnings to record $3.6 billion
With $53.2 billion in funds under management (FUM) at the end of June, even a “simplified” group structure involves re-arranging multiple chief executives.
From a host of units like Keppel Infrastructure, Keppel Land and Keppel Data Centres, the group’s operating platform is now streamlined into three divisions: infrastructure, real estate and connectivity.
In the past, Keppel Capital would handle asset management for buildings for both the private funds and the REITs, says Louis Lim, CEO of Keppel’s real estate division. “But now that we’ve consolidated, except for the REITs, all the asset management activities and operations for real estate, infrastructure and connectivity assets are undertaken by the respective divisions.”
See also: Keppel Corp books record 1H earnings on divestment as new strategy gains traction
The ongoing changes, nicknamed “Project Darwin” by staff for “the evolution of Keppel”, include consolidating support functions, human resources, finance, “and even things like risk and compliance” that used to reside in all the different business units, Lim tells The Edge Singapore. “So, we’re getting a lot more synergies.”
‘Lumpy’ development profits
In line with Keppel’s move from “lumpy development profits” to more recurring income, its real estate division has monetised over $3 billion of assets in China since 2017 and recognised a profit of more than $1 billion, says group CEO Loh in an address at the release of Keppel’s results for 1HFY2023 ended June. “Some of the unlocked capital is being re-allocated to pursue opportunities in different countries, such as India and Vietnam, as well as different asset classes, leveraging our asset-light model.”
Keppel’s real estate segment delivered net profit of $186 million for 1HFY2023, 29% lower y-o-y due to lower operating income and fairvalue gains from investment properties. These were partly offset by higher asset management income, development profits and gains from capital recycling.
Sinking to a loss of $28 million, operating income saw lower contributions from Keppel’s sponsor stakes, higher net interest expense and costs incurred for new initiatives.
Fair value gains, meanwhile, decreased by $77 million y-o-y to $31 million, largely due to lower fair value gains from investment properties, and share of fair value losses recognised by Keppel REIT on its investment properties.
Asset management income grew 54% y-o-y to some $20 million, driven by higher acquisition fees from an office tower in Seoul, and higher management fees relating to acquisitions completed in 2022.
However, development profits remain the bulk of profits for now. On the back of higher contributions from Singapore trading projects and from the Sino-Singapore Tianjin Eco-City with the sale of a land-plot in 1H2023, development profits rose 29% y-o-y to $142 million.
During 1H2023, the segment also recorded a $21 million gain from en-bloc sales of a project in Ho Chi Minh City, Vietnam, and a project in India.
Keppel’s strategy to secure more recurring income is currently seeing more promise in its infrastructure division instead.
The group’s recurring income surged 62% y-o-y to $340 million in 1HFY2023, making up over three quarters (76%) of net profit from continuing operations, compared to just under half (48%) in 1HFY2022.
Of this figure, $307 million in recurring income came from the infrastructure division, while $41 million came from the connectivity segment.
Real estate, however, contributed a $8 million loss in recurring income for the first half of the year.
Sustainable urban renewal
Keppel’s infrastructure division is driving recurring income by accelerating growth in renewables, clean energy and decarbonisation solutions, says Loh.
Keppel hopes the sustainability megatrend will also be the wind under the wings of the real estate segment.
“As we move away from being a traditional property developer, there are a number of changes that we have to make to ensure that we’re focused more on growing recurring income,” says Lim. “Sustainable urban renewal, for example, is an area where we can get more recurring income, both in terms of fees for the management of these assets, as well as the operation of these assets.”
Sustainable urban renewal, or SUR, has been touted as one of Keppel’s key businesses going forward.
According to Loh, incorporating smart and sustainable features into retrofitted buildings will enhance the assets’ performance and value. “The real estate division is actively working with our private funds to incorporate SUR features as part of our arsenal of asset enhancement initiatives.”
SUR targets buildings that are 30 to 40 years old, says Tan Szue Hann, Keppel’s head of sustainability and deputy general manager of SUR. “[A building] could be performing a bit less efficiently than it used to, or a lot less efficiently than it used to… We look at a stepwise approach towards how we can reduce energy consumption and, therefore, improve the performance of that building.”
Speaking at the Built Environment Leaders’ Summit on Sept 6, Tan says SUR is involved in projects in China, India, Singapore and South Korea. “We’re [also] looking at Japan, Australia and developing markets like Vietnam, where there is rife activity around renewing existing buildings.”
An architect by training, Tan joined Keppel in October 2022 from Marina Bay Sands.
He outlines SUR’s process: “We start out with a conscious decision as to whether the building needs to be retrofitted or fully redeveloped. Where the retrofit option makes sense, we will move towards saving embodied carbon. The first line of defence is the facade, then the engineering and the cooling or heating systems, depending on the climate, and introduction of renewables, improvement of lighting, then water circularity. All that wraps up under building controls, which makes the systems more efficient.”
As a case study, Tan cites the 15-storey Samhwan Building in Seoul, which Keppel acquired for some $228.7 million in December 2022. Completed in 1980, the Samhwan Building had a total gross floor area (GFA) of 31,403 sq m (338,019 sq ft).
Through proposed works, the total GFA of the building will be enhanced by approximately 30% via horizontal expansion, says Tan. Works are expected to be completed in 1H2025, and Tan’s team forecasts energy savings of over 30% with cost savings of some $1.2 million annually.
Closer to home, Keppel South Central is the group’s upcoming showpiece in Singapore. Slated for completion in 4Q2024, the 33-storey commercial tower at the former site of Keppel Towers will be a “next-generation smart building” with 24/7 facilities.
The Green Mark Platinum Super Low Energy building will boast 650,000 sq ft of “technology-forward spaces”, comprising Grade-A offices, flexible workspaces, as well as retail and event spaces.
According to Keppel, the green features include a “high-performance facade system” that will “significantly reduce” the amount of solar heat gain in the building, as well as smart building management systems, rainwater harvesting systems and the use of renewable energy.
These have an impact on the bottom line. Lim cites a 2018 study by University of Cambridge researchers Ben Dalton and Franz Fuerst, which claims green certifications yield a rent premium of 6.0% and a sales premium of 7.6%.
Keppel South Central’s annual energy consumption will reportedly be 40% more efficient compared to a regular commercial building, with cost savings of some $1.8 million annually.
Now in talks to secure tenants, Lim notices that companies are scouting for potential offices with their sustainability teams in tow. “Definitely, from a company perspective, there’s a push to be in more green buildings. They also see this as a draw, especially when employees today have more of a purpose mindset, and they, too, want to be in buildings that are good for the environment… We have better air temperature [and] better air quality; tenants will benefit from those as well as some of the solutions that we’re putting in, like flex spaces.”
As Keppel’s reorganisation gathers steam, Lim emphasises two immediate targets. “One: What we’re able to achieve with sustainable urban renewal, with our own buildings, and being able to show more examples and proof points that this concept works — it not just creates value for the landowner, but can also enhance tenant experience in the building.”
Lim adds: “The second area that we are hoping to really feature is how we help SMEs, not just for building solutions but providing things like infrastructure-as-a-service or connectivity-as-a-service; to come up with a product that makes sense, that we can market and shout about.”
Photos: Keppel Corp, Albert Chua/The Edge Singapore
