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Citing better portfolio mix, OCBC Investment Research raises fair value for Keppel DC REIT

The Edge Singapore
The Edge Singapore  • 2 min read
 Citing better portfolio mix, OCBC Investment Research raises fair value for Keppel DC REIT
The two data centres SGP7 and SGP8 which Keppel DC REIT is acquiring / Photo: Keppel DC REIT
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OCBC Investment Research, citing an improved portfolio quality mix, has kept its buy call on Keppel DC REIT while raising its fair value from $2.15 to $2.44.

In its Dec 27 note, OIR says it is positive on the REIT's recently announced acquisition of two new-generation AI-ready hyperscale data centres here in Singapore, namely KDC SGP7 and KDC SGP 8.

Under terms of the proposed acquisition, Keppel DC REIT is taking an initial 99.49% effective interest in the data centres but this is expected to eventually reach 100% in FY2025. The deal was completed on Dec 27.

The agreed property value for KDC SGP7 and 8 is a total of $1.03 billion and the REIT expects to incur another $350 million to extend the land tenure by 10 years to 25.5 years in 2025. The expected net property income yield is attractive at between 6.5 and 7% on a stabilised basis. 

The REIT has completed its equity fund-raising exercise and raised just over $1 billion from the private placement at $2.09 per unit, plus a preferential offering at $2.03 per unit.

OIR says that despite funding from equity, the acquisition is accretive. It has thus raised its FY2025 distribution per unit forecast by 4% but has lowered its FY2024 DPU forecast by 1.9% due to timing differences between the dilution and income contribution from the assets.

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"Once the acquisitions are completed, we believe Keppel DC REIT will be better positioned for growth given that the two data centres are AI inference ready in a market which has healthy demand and supply dynamics, have excellent connectivity to key network infrastructure and are already 100% contracted to global hyperscalers," says OIR.

With the acquisition, the REIT's AUM in Singapore will increase from around 53.1% to around 65.5% of its total portfolio value. Meanwhile, it will reduce its relative exposure in China. 

Down the road, a third data centre, dubbed KDC SGP 9, is slated for development on the same site as the other two data centres. "While this is not part of the current deal, it does present a potential pipeline in the future," says OIR.

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Besides factoring in this transaction, OIR has also raised its risk-free rate assumption from 2.50% to 2.75%, but kept its overall cost of equity assumption at 6.9% due to a lower beta due to an improved portfolio quality mix. 

After rolling forward its valuations, OIR's fair value is increased to $2.44 from $2.15.

Keppel DC REIT changed hands at $2.19 as at 4.15 pm, up 0.92%.

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