SINGAPORE (June 29): Keppel REIT’s wholly-owned sub-trust Keppel REIT (Australia) Sub-Trust 5 has entered into an implementation deed to acquire a 50% interest in a premium office tower to be developed at 311 Spencer Street in Melbourne, Australia for A$347.8 million ($362.4 million).

Sited on freehold land, the 42-storey Grade A office tower will have an estimated total net lettable area (NLA) of 717,000 sq ft.

The property is strategically located between Melbourne’s central business district and the new Docklands precinct, which is an extension of the CBD.

Construction of the office tower will commence in the third quarter of 2017, and practical completion is expected to be achieved in the fourth quarter of 2019.

The transaction will be funded through a combination of debt and part of the proceeds from the divestment of 77 King Street in Sydney in Jan 2016.

The manager of Keppel REIT says it will determine the optimal funding structure, depending on prevailing market conditions and other factors.

“This is part of Keppel REIT’s continuous process to improve its portfolio through strategic divestments and acquisitions, and in line with Keppel REIT’s objective of delivering sustainable returns to our unitholders over the long term,” says Tan Swee Yiow, CEO of Keppel REIT manager.

When the development is completed, it will be fully leased to the Assistant Treasurer for the State of Victoria on a 30-year net lease. Under the agreement, the lease will include fixed annual rental escalations throughout the entire lease term, and options to renew for three additional terms of five years each.

“The new office tower at 311 Spencer Street will provide unitholders sustainable income growth over the long term and a stable average yield of 6.4% per annum over the first 15 years from the lease commencement,” says Tan.

With the addition of the new property, Keppel REIT’s total assets under management in Australia will increase to 15%, from 11% as at Dec 31, 2016.

Meanwhile, its portfolio weighted average lease expiry (WALE) by net lettable area will extend to approximately nine years, from around six years as at Dec 31, 2016.

Units of Keppel REIT closed half a cent lower at $1.15 on Thursday.