Keppel DC REIT - DBS Research 2016-01-12: Potential supply pressures in Singapore

KEPPEL DC REIT AJBU.SI

Keppel DC REIT - Potential supply pressures in Singapore

47% increase in Singapore’s data centre supply potentially putting short term pressure on rents.
Risk of tenant migration for KDCREIT is mitigated by its quality portfolio in Singapore.
Strong demand expected to absorb supply over next couple of years next couple of years.

It was reported in the Business Times and Straits Times today that there is a large increase in data centre supply in Singapore this year. The article was based on a recent Cushman & Wakefield report.
The salient points from the article are as follows:
- Singapore’s data centre market is likely to grow from US$963.2m in 2014 to US$1.27bn this year. Current IT power supply of c.248.5MW will be ramped up by 115.9MW or 46.6% of current supply this year, which is likely to put some short-term pressure on spot rents.
- Average industry occupancy rate now hovers around 70% and may dip further.
However, Cushman & Wakefield notes that due to increased compliance requirements on data security from the finance industry and growth in data storage and management, the increase in supply should be absorbed over the next couple of years. Annual absorption by sq ft from 2008 to 2015 grew at a CAGR of 28%.
By 2018, Cushman & Wakefield expects Singapore to turn into a “landlord’s market”.

KDCREIT’s two properties in Singapore, S25 and T25, contribute only 41% of the REIT’s group revenues. Given the increase in supply, there is the risk of tenants migrating from ageing facilities or moving to better quality data centres.
In our view, these risks are mitigated by the fact that S25 and T25 are both high-spec facilities.
S25 and T25 are Tier 3 data centres (2nd highest tier of data centres) that offer their tenants 99.982% availability, low annual downtime of around 1.6 hours and 72-hour power outage protection.
Risk of tenant migration is further mitigated by KDCREIT’s relatively new facilities. S25 and T25 were only refurbished in 2014 and 2010 respectively.
Moreover, c.25% of the revenue from Singapore is based on fixed rentals with 3% annual escalation.
In addition, with many data centres being used for critical business functions, the track record of a data centre operator is important.
KDCREIT is backed by Keppel T&T, which is an established and reputable operator in Singapore. In our view, this should provide some client stickiness.

While there is some near-term risks to spot rents in Singapore, we believe this is mitigated by KDCREIT’s quality portfolio in Singapore.
We continue to like KDCREIT’s exposure to the rising global usage of data and demand for data centres, as well as the defensive elements in its earnings.
Approximately 30% of group NPI is underpinned by master leases with in-built annual escalations of 2-4%. Moreover, with KDCREIT’s low gearing (c.30%), we see upside risks to its earnings from potential acquisitions.
Maintain BUY with TP of S$1.14.
Do note KDCREIT will be releasing its 4Q15 results this coming Thursday evening, 14 January. DBS will also be hosting a post-results luncheon this Friday, 15 January.

Derek Tan DBS Vickers | Mervin Song CFA DBS Vickers | http://www.dbsvickers.com/ 2016-01-12

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