Broker: UOB Kay Hian
Date of Report: 09 July 2025

Keppel DC REIT: Riding the Hyperscale Data Centre Wave for Strong Growth and Rental Uplift

Summary: Keppel DC REIT’s Strategic Pivot Powers Growth Prospects

Keppel DC REIT (KDCREIT) is making decisive moves to cement its leadership in Asia’s fast-growing data centre sector. With a focused shift toward hyperscale data centres, robust tenant relationships, and strategic divestments, KDCREIT is positioned to capture surging demand driven by AI, cloud, and digital transformation trends. Backed by strong financials, a healthy pipeline, and support from its sponsor, the REIT offers compelling prospects for investors.

Company Overview

• Share Price: S\$2.22
• Target Price: S\$2.69 (Upside: +21.2%)
• Previous Target Price: S\$2.87
• Market Cap: S\$5,009m
• GICS Sector: Real Estate
• Listed Since: 12 Dec 2014 (Asia’s first pure-play data centre REIT)
• Major Shareholder: Temasek Holdings (21.8%)

KDCREIT’s Hyperscale Strategy: Building for the Future

KDCREIT is actively developing long-term relationships with hyperscale tenants, now accounting for 63% of its rental income as of Q1 2025. The REIT has repositioned its portfolio toward hyperscale assets by acquiring three major data centres:

• SGP7 and SGP8 (Singapore): Completed acquisition on 27 Dec 2024.
• Tokyo Data Centre 1 (Japan): Acquisition completed 31 Jul 2024.

At the same time, KDCREIT has divested from smaller, sub-scale assets, including:

• Intellicentre Campus (Sydney, Australia): Sold for A\$174m (S\$152.1m) on 24 Jun 2024.
• Basis Bay Data Centre (Cyberjaya, Malaysia): Agreed sale for RM55.1m (S\$16.7m), effective 2 Jan 2025.
• Kelsterbach Data Centre (Frankfurt, Germany): Sold for €50m (S\$70.6m) on 24 Mar 2025.

Growth Drivers: Hyperscale Tenants and Strategic Partnerships

• Internet Enterprises: These hyperscale tenants made up 63.1% of rental income as of March 2025.
• Keppel Group’s AWS Partnership: KDCREIT is set to benefit from Keppel Group’s strategic agreement with Amazon Web Services (AWS), supporting AWS’ expansion in energy, data centres, and connectivity infrastructure.
• Targeted Acquisitions: Management continues to seek data centre acquisitions in Japan, South Korea, and Europe, with a focus on AI inference workloads—an area where Singapore has a competitive advantage due to its connectivity.

Rental Reversion and Vacancy Trends: Positive Outlook in Singapore

• Tight Supply: Singapore’s data centre supply remains constrained, with new capacity unlikely until 2028. This underpins strong rental reversions and high occupancy rates.
• Rental Reversion: Positive rental reversion for colocation leases in Singapore is expected to surge to 30-40% in Q2 2025 after a moderate 7% in Q1 2025.
• Portfolio Occupancy: Occupancy stood at 96.5% in Q1 2025, reflecting slight declines due to tenant movements but remaining robust overall.
• SGP1 Enhancement Potential: Occupancy at SGP1 is expected to fall below 60% after DXC Technology vacates. This presents an opportunity to enhance the site’s AI capabilities and secure more power for expansion, with an option to extend the land lease by 30 years beyond Sep 2025.

Financial Performance: Strong Fundamentals and Growth Trajectory

Key Portfolio Metrics and Geography

• Investment by Geography:
  • Singapore: 65.3%
  • Australia: 5.4%
  • Ireland: 6.1%
  • China: 5.5%
  • Germany: 4.5%
  • Netherlands: 4.7%
  • Japan: 4.2%
  • UK: 2.9%
  • Italy: 1.1%
  • Malaysia: 0.3%
• Rental Income by Contract Type:
  • Colocation: 75.8%
  • Fully-fitted: 17.1%
  • Shell & Core: 7.1%
• Rental Income by Trade Sector:
  • Internet Enterprises: 63.1%
  • IT Services: 16.9%
  • Telecommunications: 15.9%
  • Financial Services: 3.2%
  • Corporate: 0.9%

Operating Metrics and Lease Expiry Profile

• Occupancy: 96.5% (Q1 2025), a decrease of 0.7 percentage points quarter-on-quarter.
• Aggregate Leverage: 30.2% (Q1 2025), down 1.3 percentage points quarter-on-quarter.
• Average Cost of Debt: 3.1% (Q1 2025).
• WALE by Net Lettable Area: 7.1 years (Q1 2025).
• Average Debt Maturity: 3.1 years.
• % of Borrowings in Fixed Rates: 68% (Q1 2025).

Lease Expiry Profile (as of Q1 2025):

• 2025: 13.6% by rental income, 5.4% by lettable area
• 2026: 8.2% by rental income, 6.0% by lettable area
• 2027: 4.5% by rental income, 9.2% by lettable area
• 2028: 14.4% by rental income, 8.3% by lettable area
• 2029: 29.2% by rental income, 8.8% by lettable area
• 2030 & Beyond: 30.1% by rental income, 62.3% by lettable area

Recent Developments and Outlook

• Potential Asset Enhancement Initiative (AEI) for SGP1: Large vacancies to be repositioned for AI-capable expansion, with land lease renewal option.
• Full-Year Contributions from New Acquisitions: SGP7 and SGP8 will see full 12-month contributions in 2025, with rents 15-20% below current market—offering further upside.
• SGP8 Expansion: Management is considering converting 1.5 empty floors into data halls, adding ~19,380 sq ft of lettable space.
• KDCREIT Joins Benchmark STI: Included in the Straits Times Index from 23 Jun 2025, increasing its visibility among institutional investors.

Valuation, Risks, and Earnings Revision

• Valuation: Target price of S\$2.69, based on a DDM model (cost of equity: 6.5%, terminal growth: 2.75%).
• Earnings Revision: DPU forecast for 2026F cut by 7% (positive rental reversion expectations revised down from 18% to 10%). DPU for 2027F cut by 12% due to continued provisions for Guangdong data centres.
• Key Risks: Provisions for underperforming assets in China, slower-than-expected rental reversions.

Investment Catalysts

• Rising demand for colocation space from AI and digitalization.
• Further acquisitions of hyperscale data centres in key international markets.
• Effective backfilling of vacant spaces, especially in China.

Conclusion: A Compelling Play on Data Centre Growth

KDCREIT’s strategic pivot toward the hyperscale segment, its robust financials, and exposure to structural AI and cloud trends make it a top pick in the data centre REIT space. Tight supply in Singapore, strong rental reversions, and a pipeline of international opportunities further reinforce its growth trajectory. Supported by a strong sponsor and prudent financial management, KDCREIT remains a BUY for investors seeking both yield and growth in the digital infrastructure sector.