REITs with data centres appear to have been under some selling pressure in the past two to three weeks. In general, analysts note that bond yields have spiked, and that has caused REIT yields to expand as unit prices fell.

Some analysts have also suggested that the impending IPO of Digital Realty REIT could be impacting the local REITs with data centres as the Digital Realty REIT heading for the Singapore Exchange (SGX) is likely to be listed at cheaper valuations.

Of course, analysts point out that Keppel DC REIT (KDC REIT) could be moving to an ex-growth phase with organic growth reaching a plateau. At any rate, its yield was too compressed.

Other REIT managers note that electricity prices have spiked. Most data centres, in particular those in Europe and the US, are leased on a core and shell basis where the tenants pay for the costs of the data centres.

Since the start of the year, KDC REIT has fallen more than 15%, of which 5.5% was lost in September alone. The declines caused unit prices to break below a support and its one-year low of $2.45 on Oct 4. The break below this level provides a downside objective of $2.26 initially. KDC REIT is trading at $2.37, suggesting that unit prices have yet to reach their potential downside. The 2020 pandemic low for KDC REIT was $1.76. At present, it appears unlikely that unit prices could go that far down.

The cause of the KDC REIT’s weakness could be idiosyncratic, pertaining to its JV with M1 and also its acquisition in China which investors have been lukewarm about.

In April this year, M1 and KDC REIT’s manager signed a non-binding term sheet for a JV. Under the deal, M1 sells its network assets into a special purpose vehicle (SPV) for $580 million. This JV will be funded by a combination of equity, debt and preference shares. M1 will hold 100% of the ordinary shares and KDC REIT will fund the joint venture through debt and preference shares. As a result, M1 has total control.

Based on KDC REIT’s 1HFY2021 results ended June, 71.5% of the portfolio by rental income is from colocation data centres, 19.2% from fully-fitted and 9.3% from shell and core. The fully-fitted and shell and core data centres are on double-net and triple-net leases, where the tenant bears most of the expenses. According to KDC REIT’s presentation, its clients treat the Keppel Corp leases on a pass-through basis based on the colocation agreements and lease agreements. That is, these tenants also bear the expenses of the property.

In terms of emissions, in 2020, KDC REIT’s Scope 1 greenhouse gas (GHG) emissions totalled approximately 1,927 tCO2e while Scope 2 GHG emissions totalled 213,571 tCO2e. Together, the GHG emissions for Scopes 1 and 2 were 215,498 tCO2e in 2020, an increase from 2019’s 133,464 tCO2e, due primarily to the addition of KDC SGP 4 to the REIT’s portfolio. The majority of KDC REIT’s electricity is supplied from the grid and fuel consumption is mostly diesel from backup generators, according to its annual report.

GHG emissions consist primarily of Scope 1 direct emissions from fuel consumption and Scope 2 from indirect emissions from purchased electricity. Gases included in the calculation are carbon dioxide (CO2), methane (CH4) and nitrous oxide (N2O), with totals expressed in units of tonnes of carbon dioxide equivalent (tCO2e).

The latest plans by sponsor Keppel may go some way to mitigate Keppel DC REIT’s reliance on fossil fuels. On Oct 6, Keppel announced that it plans to halve the company’s Scope 1 and 2 carbon emissions by 2030, compared to 2020 levels, and achieve net zero by 2050. The target is in line with the Paris Agreement’s goal to limit global temperature increase to 1.5°C compared to pre-industrial levels, the company said.

The Oct 6 announcement by Keppel says Keppel Data Centres will tap renewable energy where possible and work with its customers to reduce the emissions of their data centre operations.

Separately, Mapletree Industrial Trust (MINT) and Ascendas REIT have also come under some selling pressure. Out of MINT’s portfolio of $6.7 billion, data centres make up 39.8% or $2.07 billion. Ascendas REIT’s data centres account for 10% of its $15.9 billion portfolio, or $1.59 billion. KDC REIT’s properties are valued at $3.08 billion. However, MINT and Ascendas REIT have more diversified industrial property portfolios.

Photo: Data centre in Germany owned by Keppel DC REIT

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