KDC REIT’s units are priced in SGD, the distributions per unit (DPU) are priced in SGD and the REIT manager oversees the foreign exchange hedges so investors can continue receiving their distributions without hedging their positions.
In a report dated July 1, Jonathan Koh, an analyst with UOB Kay Hian, says: “Singapore is a haven due to fiscal discipline and having the lowest reciprocal tariff of 10%. The flight to safety is evidenced by a low 10-year Singapore government bond yield of 2.2% and three-month compounded Sora [Singapore overnight rate average] of 2.1%.”
As early as late last year, KDC REIT raised almost $1.09 billion via a private placement priced at $2.09 per unit and a preferential offer priced at $2.03 per unit. The equity fundraising (EFR) included an upsized private placement of $700 million in November last year, which was 3.4 times covered, with most of the book allocated to real estate specialists and long-only investors. The preferential offering to KDC REIT unitholders took place in December 2024 and raised $301 million. The EFR also included a sponsor subscription of $85 million, which was completed in February. The EFR was the largest since 2020 and one of the most successful based on the subscription rate.
The monies from EFR were to partly pay for the acquisitions of KDC SGP 7 and KDC SGP 8. As at the end of 2024, 65.3% of its assets, including KDC SGP 7 and 8, are in Singapore.
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In November, when the private placement was launched, one of the bankers involved in the book-building said Singapore assets are much in demand by investors: “No brainer; Singapore assets; significant accretion.”
More than accretion
The accretion to DPU from the acquisition is as much as 11.1% on a pro forma basis. KDC SGP 7 and 8 are being acquired in two parts. In December, KDC REIT completed the purchase 49% stake in a joint venture as well as subscribe to two new classes of securities in the joint venture which will entitle KDC REIT to 99.49% of the economic interest in the assets for up to $1.03 billion. The land lease is currently 15.5 years. KDC REIT has a call option to acquire the remaining interest in the joint venture which holds the remaining 0.51% economic interest. Should the extension of the land lease for a further 10 years be approved, KDC REIT will pay an additional $350 million. The option is likely to be exercised in 2H2025. In this event, the accretion falls to 7% on a pro forma basis.
See also: Starhill Global REIT obtains A$100 mil sustainability-linked term loan facility
For investors, subscribing to the placement may have been a “no-brainer”, but the acquisition and the structure were a trifle complicated. In the presentation on Nov 19, the REIT’s manager said the intention is to own all of KDC SGP 7 and 8.
A 7% accretion to DPU has not been experienced by S-REITs in an acquisition in recent years. Loh Hwee Long, CEO of KDC REIT Management, says: “Accretion, to me, is the default. Whatever we do, if we were to acquire something, it has to make sense to the platform. Accretion is one important measure.”
Offering more than just accretion, KDC REIT is likely to reap further upside from the acquisition. There are approximately 1.5 floors at KDC SGP 8 that are currently unutilised. The building has been designed to cater for the potential conversion of this unutilised space into data halls, which offers mid- to long-term potential for revenue upside via capacity expansion by fitting out the unutilised space, subject to obtaining the relevant authority’s approvals, including that of power.
“We want to make sure that whatever we do, we add value to the portfolio. There’s the ability to add further value, like KDC SGP 7 and 8, where we can still add additional data centre space. This will become icing on the cake in the future when we are able to unlock this value,” Loh says.
KDC REIT is part of an ecosystem where sponsor Keppel builds and operates data centres, providing the REIT with a potential pipeline of stabilised data centres. Through divestments, Keppel can recycle the capital to build new data centres. Keppel will continue to serve as the operator and facility manager for the two data centres acquired in December. According to the Nov 19 announcement, KDC SGP 7 and 8 are AI-ready hyperscale data centres 100% contracted to global hyperscalers on a colocation basis.
Other Singapore-based data centres KDC REIT owns include KDC SGP 1-5 and DC1.
Scarcity factor
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In a May 19 report, Powering AI: The Inferences, Morgan Stanley observes that multiple data centres in Asia are still being built for training while inferencing demand for artificial intelligence (AI) still needs to catch up.
KDC SGP 7 and 8 are new-generation AI-ready hyperscale data centres capable of handling AI inference workloads. The data centres also have the flexibility to accommodate fit-out modifications, including liquid cooling.
How should investors think about KDC REIT? Loh likens data centres to real estate, where location and connectivity are critical. Retail malls must be in catchment areas where the population resides and on a transport node, such as bus and train interchanges, so people can get to them easily. Similarly, Singapore is the transport node for data centres as it is a landing point for 26 subsea cables. The city-state is also a financial hub, a fintech hub, and an air and sea hub because of its efficient port and airport. Connectivity is an essential construct of Singapore’s DNA, which is why it is an attractive landing point for subsea cables, ships and planes.
“In the case of data centres, the connectivity angle comes into play; the fibre connectivity and neutrality mean you have multiple fibre providers and low redundancy. These are very important when it comes to data centres. Our focus is on hyperscalers. These customers are very particular about downtime because their product is mission-critical. They cannot afford any slippage,” explains Loh.
Since KDC REIT had its genesis in Singapore in 2014, the city-state has emerged as the most critical data centre hub in Asia, where there are high barriers to entry. With scarce land, power and water, the Singapore authorities placed a moratorium on the construction of data centres in 2019. In 2022, the Singapore Infocomm Media Development Authority lifted the moratorium with 80 megawatts (MW) of new capacity split between four data centre operators — AirTrunk-ByteDance (Consortium), Equinix, GDS and Microsoft. AirTrunk was acquired by Blackstone in December 2024.
“We have a heavy weightage in Singapore, a super Class A data centre market. That helps us differentiate ourselves from other platforms in terms of portfolio construction. We are the only REIT that has an 82% exposure to Asia. There is a scarcity factor that we possess,” Loh points out.
Mapletree Industrial Trust, Digital Core REIT and the upcoming NTT DC REIT’s portfolios are skewed toward the US data centre market, the world’s largest data centre market. In the US, the data centre REITs also undertake development, which changes their return profile.
The SGD is an attractive alternative for investors whose home currency is the US dollar. In an update on June 30, Sim Moh Siong, currency strategist, Bank of Singapore, says: “There are many reasons not to like the USD. Some are structural, like erratic trade policies and fiscal risks. They have earlier caused the USD to weaken despite its relative yield advantage. But the risk of a more dovish Federal Reserve eroding USD’s yield advantage is the latest source of USD weakness.”
“From a data centre perspective, we like markets where there are relatively higher barriers to entry, whether from the perspective of power availability, site availability or ease of construction. Singapore is heavily power supply-constrained; Japan’s measured power supply comes with a very long lead time. Markets of such nature tend to be more favourable to landlords,” adds Loh. Last June, KDC REIT acquired a data centre in Greater Tokyo.
Power availability is a key component of a data centre. For instance, KDC REIT is divested its Kelsterbach Data Centre in Germany. “We exited Kelsterbach. We did a study to see if we could bring in more power. We could only bring in 1MW to 2MW by 2031–2032, which is long-drawn. When the offer came about, it made sense for us to exit and redeploy into more significant projects,” Loh says.
KDC REIT’s data centre type also puts it in a different category from its peers. In 1Q2025, colocation data centres accounted for 75.8% of rental income, followed by fully fitted data centres (17.1%) and just 7.1% of shell and core.
“Our sponsor has very strong operating capabilities, so we’ve moved up the risk curve to get much better yields. Because your end customers are mission-critical and have no downtime, your operating skills have to be tip-top. We do not do colocation everywhere. To operate a fully-fitted data centre well, you need strong operating skillsets on the ground. For new markets, we go for a powered shell or triple net basis where the end user will run the facility,” Loh explains.
“It’s actually a bespoke, calibrated approach that we adopt. Singapore and Dublin are constrained markets. We are able to sweat the assets harder. We have a core portfolio curated to deliver stable returns. Our ability in selective colocation markets allows us to flex our muscles to generate outsized organic growth,” Loh continues. For instance, in FY2024, KDC REIT’s rental reversions were 39%, the highest among S-REITs. KDC REIT owns two data centres in Dublin.
New competition
Should investors be concerned about KDC REIT’s future, given that data centre capacity is likely to mushroom in the Johor-Singapore Special Economic Zone (JS-SEZ)? Barclays says the current data centre capacity is 10 MW in the JS-SEZ. This would balloon to 1.5GW if all the data centres that have been approved are built.
Some market observers have compared the data centre built in Johor to Forest City. Other market observers reckon that Johor’s data centres can be used for “learning” while Singapore’s data centres are for “inferencing”.
According to the report Data Centers: Bytes and Rights by legal firm Reed Smith, data centres and electronics are highlighted as key sectors likely to benefit from JS-SEZ-linked policy support and investment flows. “Johor’s positioning (connected by two land linkways and immediately bordering land-constrained Singapore) makes it an ideal spillover location for hyperscalers, colocation providers and investment funds,” the authors Ho Han Ming, Bryan Tan, Shawn Tan and Joyce Fong say.
The report says the JS-SEZ has lower land costs, cheaper energy, ample water resources, scaleability, existing fibre networks and proximity to Singapore’s subsea cable ecosystem.
To Loh, the so-called data centre construction boom in Johor is not a negative development for Singapore because Singapore has limitations on land and resources. “Having a greater Singapore region with Johor and Batam is important for the survivability of the data centre market. We can compete against Greater Tokyo and Sydney. Otherwise, we will be marginalised in a generative AI world.”
Although the capacity announced in Johor sounds like a supply shock, the first phase is backed by some level of demand. “It will be gradual,” Loh says. The Johor data centres will focus on learning and training, which require significant amounts of power that Singapore does not have.
Inferencing still requires power, but less so than training. “Of course, as demand continues to grow, you definitely need more data centres but in strong latency locations,” Loh says.
Additionally, KDC REIT is focused on developed markets, mainly in Asia Pacific, and is in the process of divesting its Basis Bay data centre in Malaysia.
“We are exiting Malaysia. We’ve had Basis Bay since our initial public offering. It’s non-core, small and hasn’t been performing very well. However, Kuala Lumpur is still a good DC market; this is asset-specific,” Loh says.
Impact of tariffs
Investors are concerned about the impact of the Trump tariffs on the data centre sector. Morningstar says: “While Trump’s tariffs could negatively affect data centres and cloud operators in the US, we consider KDC REIT to be less affected, given that its data centre portfolio is concentrated in the Asia Pacific and Europe, with no assets in the US. We believe the demand and supply dynamics for its Singapore data centres remain healthy, supporting a resilient performance for the trust.”
Loh says the immediate impact is limited, but if the tariff war persists for an extended period, costs are likely to rise. “We did a check for the equipment we require on a day-to-day basis; not much gets sent to and from the US. In the long run, if this whole thing persists, inevitably, because of how the global supply chain is connected, it will ultimately have some impact.”
The other concern has been the cloud providers and hyperscalers building their own data centres. In fact, hyperscalers have already built their own data centres, but usually in their home markets. “They still can’t do everything on their own. From a geographical standpoint, they still have to rely on third-party owners to fulfil demand in places like Asia,” Loh says.
In 2021–2022, KDC REIT took a misstep. The REIT acquired two fully-fitted data centre facilities in Guangdong (GDC 1 and 2) for the equivalent of $297.1 million in a deal similar to a sale-and-leaseback transaction from Guangdong Bluesea Data Development. KDC REIT subsequently acquired a third data centre, GDC 3, from Bluesea in the same data centre park. Bluesea had issues and was unable to meet rental agreements.
Darren Chan, an analyst at Phillip Securities Research, says rental arrears continue to accumulate at the Guangdong data centres. “To date, Bluesea, the lessee, owes over $35 million. There remains no clear timeline or assurance on when or if payment will be received,” says Chan in an April 21 report.
“We have not seen material change yet, but the bigger macro picture has improved. I think that will flow through. Things on the ground started to move at the end of last year. We are also starting to see more enquiries. If those materialise, we can bring the asset back up to health together with the master tenant,” Loh acknowledges.
KDC REIT has made full provision for the GDCs: “We are at ground zero, so whatever we are able to do from an improvement perspective will become additional upside to the numbers that we have today,” Loh says.
Other plans and valuation
Asked if it would invest in data centres, real estate fund manager M&G Investments says: “The real estate component of data centre investments is relatively small (about 20%–30%), while infrastructure makes up 70%–80% of the investment, requiring significant capital expenditure.”
Loh says land costs could be as low as 10% of the total data centre valuation in markets where land is plentiful. On May 9, EdgeProp reported that, on average, industrial land in Johor has been around 96% cheaper over the past five years than in Singapore. Yet, data centre costs, according to research by Cushman & Wakefield (see table), are only 33% lower than Singapore’s. The average cost for 1MW of capacity is about US$10 million.
Loh adds that KDC REIT has a “small bucket” of smaller assets, comprising around 3% of non-core assets. “If the right offer comes about, we will not be shy about recycling and focus on areas we can execute well to deliver returns,” Loh says.
“Management has decided to divest Kelsterbach for EUR50 million, 28% above its end-December 2024 valuation. We are positive about this divestment as the proceeds can be used to pay down debt or reinvest into better opportunities,” Morningstar reports.
Data centre investment is not for everybody. “Given the high capital intensity, significant operational costs and uncertain long-term real estate value of data centres, such investments are not as suitable for core strategies, such as the M&G Asia Property Fund, which focus on high quality, income-producing assets that allow for stable and predictable cash flows aimed at investors seeking relatively lower risk exposures,” M&G Investments says.
Undoubtedly, KDC SGP 7 and 8 are expensive in absolute terms. According to KDC REIT’s announcement on Nov 19, the distributable income from SGP 7 and 8 was $59.5 million, providing a net distributable income yield of 4.3%. Interestingly, KDC REIT has rallied strongly this year (possibly with the potential IPO of NTT DC REIT). Hence, its historic DPU yield is compressed at 4%, making the new data centres yield- and DPU-accretive on a net basis.
In 1Q2025, KDC REIT announced a 14.2% rise in DPU to 2.503 cents despite the divestment of Intellicentre Campus in Australia and having 1Q2025 income from the Guangdong data centres netted off via loss allowances, which had an impact of 0.249 cents on 1Q2025 DPU.
The negatives were offset by the positives, with DPU growth underpinned by the accretive acquisitions of KDC SGP 7 and 8 and Tokyo DC 1, higher finance income from Australia Data Centre Note, and lower finance costs from falling interest rates and interest savings from loan repayments. Moreover, the REIT reported rental reversions of 7% in 1Q2025.
Last June, KDC REIT divested Intellicentre Campus for A$174 million ($145 million) at a 35.4% premium over valuation. Part of the proceeds were reinvested in an Australian Data Centre Note with an initial yield of approximately 7% and an annual inflation-linked escalation for 8.5 years.
Chan, the Phillip Securities Research analyst, says 13.6% of leases are up for renewal in FY2025, most of which are Singapore colocation leases. “We expect a positive rental reversion of around 30% in 2Q2025, driven by the renewal of a major Singapore colocation contract. Singapore’s strong demand and limited supply continue to provide landlords with significant pricing power,” Chan says.
JP Morgan says the interest cost guidance given to analysts in 1Q2025 is 3%. According to the Nov 19 announcement, aggregate leverage will likely rise following the land lease extension for KDC SGP 7 and 8. JP Morgan puts this at 35%.
KDC REIT and Keppel have 34 data centres across Asia Pacific and Europe with a total gross power capacity of 650MW. Keppel aims to expand its data centre portfolio to 1.2GW in total in the near future, which will form a pipeline of assets that the REIT may potentially acquire.
Since its inception in December 2014, when KDC REIT listed at 93 cents per unit, to June 30 this year, it has returned 150%, excluding DPU. Its unit price is up 5.5% this year (excluding DPU) and up 21% since the low of $1.91 on April 9 (after the Liberation Day bond market volatility). Because of the premium ascribed to KDC REIT by investors, it can command a lower cost of capital than other S-REITs, making accretive acquisitions possible.
Keppel’s private funds are developing a third plot near KDC SGP 7 and 8. The Keppel group is also working on a floating data centre. These are possible pipelines for KDC REIT.
“The reality is there will be a balance between recycling and acquisition growth; that is the approach,” Loh says.
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