Keppel REIT Enters Japan Market with $60M Ginza Office Buy

Keppel REIT is entering the Japanese market with a S$85.7 million ($60.5 million) acquisition on the capital’s most famous shopping street, according to an announcement by the manager of the Singapore-listed trust late Friday.

The REIT is set to acquire Ginza 2-chome, a nine-storey building located close to landmarks including the Seiko House Ginza Clock Tower and Ginza Mitsukoshi department store, from Japan’s Tokyu REIT, in a move which the manager tied to geographic diversification and dependable cash flow.

“This strategic acquisition of Ginza 2-chome in Tokyo marks Keppel REIT’s entry into Japan, the world’s third largest economy and Asia’s largest developed market,” said Wee Lih Koh, chief executive officer at Keppel REIT Management Ltd in the release. “In line with our active portfolio management strategy, we believe this quality addition will strengthen our geographical and income diversification, provide greater stability and enhance Keppel REIT’s overall portfolio returns.”

The SGX-listed trust pointed to Japan’s “low interest rate environment” as part of its strategic expansion into the country, with rates at -0.10 percent as of 28 October, supporting agency research that shows the depreciation of the yen and the Bank of Japan maintaining its low interest rate policy as drivers for real estate investment by foreign investors in the country.

Tokyo Exposure

With chief executives from Singapore-listed trusts ESR-Logos REIT and LendLease REIT pointing to rising concerns regarding funding costs and availability of quality assets domestically at Mingtiandi’s Singapore forum last month, Keppel REIT has turned to the Japan market to help resolve some of those challenges.

The Ginza asset will “enhance the visibility of Keppel REIT in the Japanese market and pave the way for the REIT’s future expansion in the well-established and scalable investment grade office market in Japan,” said Koh.

Upon completion of Keppel REIT’s purchase, the local branch of Keppel Capital would be appointed asset manager of the Ginza 2-chome, meaning the trust would be able to leverage the team’s experience in the local market – including its previous asset enhancement of the Kanda 282 and Meguro Villa Garden office towers in Tokyo – both held by Keppel-managed private funds – and seek further growth opportunities in the country.

Keppel REIT will pay S$84.4 million for an effective 98.47 percent interest in Ginza 2-chome, with the remaining stake to be held by a private entity controlled by Keppel Capital, which also owns the manager. The freehold office property covers about 5,098 square metres (54,874 square feet) of gross floor area in the Chuo ward’s Ginza district, with the transaction valuing the building at S$16,808 per square metre.

Situated in Chuo-ku, home to major corporations including the Bank of Japan and Tokyo Stock Exchange, the Ginza 2-chome is a 2-minute walk from the Shintomicho station on the Tokyo Metro Yurakucho Line, and about an 8-minute walk from the Ginza station on the Tokyo Metro Ginza Line, according to Tokyu REIT’s release.

The 2008-vintage building, which comprises eight storeys of office space atop a ground floor retail level, was built on a 805 square metre site at 2-15-2 Ginza, one of Tokyo’s most expensive shopping strips. The building is also within 500 metres (546 yards) of landmark buildings such as the Klein Dytham-designed Ginza Place, and the historic Kabuki-za Theatre.

With an occupancy rate of 36.3 percent as at 28 October, the Ginza 2-chome is currently leased to a subsidiary of NTT Data Corporation, with Keppel REIT planning to lease up the remaining space after completion of the deal, which is expected to take place by the end of November this year.

The acquisition will be funded entirely with Japanese yen denominated borrowings, and Keppel REIT’s aggregate leverage would be approximately 39 percent post-acquisition, said the trust in its announcement.

When fully leased, the property is expected to achieve a net property income yield of 3.1 percent, which will provide a distribution per unit accretion of 0.5 percent to unitholders on a pro forma basis, it said.

Overseas Diversification

Keppel REIT’s acquisition would bring the real estate trust’s assets under management to approximately S$9 billion across 12 properties in Singapore, Australia, South Korea and Japan, said the manager in its announcement. Post-acquisition, the trust’s AUM would go up by 12.5 percent from the third quarter of last year, which totaled just more than S$8 billion at the time.

The purchase follows a lead set by other Singapore giants entering Japan’s office sector. In November of last year, CapitaLand Investment Limited teamed up with PGIM Real Estate and a set of Japanese investors in separate deals to establish a pair of private funds in Japan and South Korea worth S$688 million.

In Japan, CapitaLand’s private fund set up a new JPY 44.1 billion (then $390 million) joint venture vehicle with a set of four local capital partners to acquire stakes in a pair of Greater Tokyo office projects.

Also as part of its geographical and income diversification, Keppel REIT last December bought Blue & William, a grade A office project in North Sydney from Hong Kong’s Phoenix Property Investors and Australian developer Thirdi. The acquisition added a sixth asset to its Australia portfolio for a total development consideration of A$327.7 million (then $234.1 million).