SINGAPORE (July 19): Maybank Kim Eng is downgrading its rating on Keppel REIT (KREIT) from “buy” to ”hold” while maintaining its $1.18 target price.
In a Wednesday report, analyst Derek Heng says, “While KREIT remains a good proxy to a bottoming office market, we believe valuations are now fair following its 18% rally YTD.”
The underlying performance of the group’s portfolio was broadly in line with Maybank's expectations, but the lack of capital distributions YTD resulted in 1H hitting just 46% of Maybank’s full-year estimate.
See also: Keppel REIT 2Q DPU falls 12% to 1.42 cents
Heng expects KREIT’s management to ease the DPU weakness with capital distributions by gradually returning the $48 million of undistributed gains over the next few years.
“While rental reversions held steady at 0% in 1H17, we expect more negative reversions in the year ahead,” says Heng.
KREIT recently entered a deal for a 50% stake in 311 Spencer Street for a total consideration of A$347.8 million ($375.9 million).
The analyst views this positively, but does not expect any income contribution in the near term to cushion the DPU headwinds as the property is under construction till 2019.
Preliminary data from CBRE suggests that Singapore’s office market may have bottomed as Grade A rents remain unchanged at $8.95 psf pm in 2Q17.
Capital values for Grade A offices also increased 2% q-o-q to $2,750 psf, reflecting strong investment demand.
Units of KREIT closed 2 cents lower at $1.15.