FOLLOWING the recent release of Keppel Reit’s third quarter earnings, DBS Equity Research raised an interesting piece of market speculation. It is about a potential sale of Bugis Junction Towers, which is fully owned by the trust.

“… management reiterated that it does not have any intention to sell the building, unless it receives a compelling offer,” DBS said.

The 15-storey office block is part of a mixed development that also includes a mall owned by CapitaLand Mall Trust and the InterContinental Singapore, owned by Frasers Hospitality Trust.

Bugis Junction Towers, with 248,013 square feet net lettable area (NLA) as at Sept 30 this year, is on a site with a balance leasehold tenure of about 71 years.

For one it presents an opportunity to recycle capital – by selling an older, low-yielding asset and acquiring a higher-yielding asset, be it in Singapore or abroad. Keppel Reit has investments in the Australian commercial property sector but perhaps it could be thinking of venturing farther afield – for instance, Europe and the United States.

Based on market talk, Keppel Reit commisioned Cushman & Wakefield to conduct an informal expressions of interest exercise for Bugis Junction Towers. This closed last month and is understood to have drawn a few offers – all below the owner’s expectation of above S$2,300 per square foot (psf) based on NLA. The property was valued at S$525 million as at end-2017, which works out to S$2,147 psf on the NLA of 244,579 sq ft as at the same date, or a lower S$2,117 psf based on the slightly higher NLA as at Sept 30, 2018.

Last year, the asset generated S$15.11 million net property income, translating to 2.9 per cent net yield on valuation.

The building enjoys full occupancy, testimony to the strong leasing demand for the location – above the Bugis Interchange MRT Station, near the financial district. Enterprise Singapore recently committed to increase its footprint, making it the biggest tenant in the office building.

Based on information which the Reit manager released in the slides presentation accompanying its latest results, Enterprise Singapore accounts for 3.9 per cent of the trust’s portfolio NLA of 3.7 million sq ft; this puts the government agency’s space at Bugis Junction Towers at about 144,300 sq ft – or 58 per cent of the building’s NLA.

To make way for this expansion, Keppel Group units Keppel Land and Keppel Capital will soon move out of Bugis Junction Towers to Keppel Bay Tower near Harbourfront MRT Station.

There is also talk that coworking space provider UCommune may be taking up space in Bugis Junction Towers – probably the top floor.

These new signings amid the ongoing increase in Singapore office rents suggest an uplift in net property income from Bugis Junction Towers.

That would be good news to a potential buyer. However a lingering concern is that a chunk of the asset has been leased to one tenant for a relatively long duration.

This lengthens Bugis Junction Towers’ weighted average lease expiry or WALE; this measures the average time period in which all leases in a property will expire.

Given the current stage of the Singapore office rental cycle, most potential buyers would prefer a building with a shorter WALE – for example, if leases for 30 or 50 per cent on leased area in the building are expiring in 2019-2020. This would be when rents are expected to plateau before the next big wave of office completions begins from 2021. In short, the lease expiry profile for Bugis Junction may be such that an incoming buyer does not have a chance to capitalise on rising rents in the next two years.

Nevertheless, there may be parties including foreign ultra high net worth family offices keen on a well-located Singapore office asset. And who knows if Keppel Reit could be persuaded to relook its definition of a compelling price offer for the property.

If Bugis Junction Towers does get sold, the focus could then fall on another of the Keppel Reit’s assets: Ocean Financial Centre. Its end-2017 valuation of S$2.62 billion reflects about S$3,000 psf on NLA and over 3 per cent net yield.

Given its plum location – along Collyer Quay, next to Raffles Place MRT Station and a stone’s throw from Marina Bay – and the fact that this is a relatively new 43-storey building with 92 years’ balance leasehold tenure on the site, Keppel Reit may require an even more compelling offer before it parts with this asset.