– The continued stronger-than-expected recovery in office rentals augurs well for rental reversions and asset revaluations into FY07F. We have upped our DPU forecasts (by 2.9% in FY07F and 11.1% in FY08F) and NAV (to S$3.52/unit from S$3.17/unit) and lift our call to STRONG BUY from Buy.

– Low gearing, asset pipeline underpins acquisitive growth . K-REIT Asia has one of the lowest gearing levels among our universe of REITs, at 0.28x. On our estimates, with gearing of 0.45x, K-REIT could debt fund an additional S$210mn of new acquisitions and increase its assets under management to about S$900mn. As office values rise, sourcing assets will be increasingly difficult. That said, Keppel Land’s office portfolio of 1.3mn sf in Singapore and 0.8mn sf in the rest of Asia provides a substantial pipeline of assets for K-REIT. This pipeline should be augmented by assets owned by parent Keppel Corporation. Certainly the pipeline offers scope for K-REIT to reach its portfolio target size of S$2bn over the next few years”.

– Lease renewal pick-up at strongest point in cycle . The current committed occupancy of the portfolio is 99.4% (end-1Q07), versus 95% in December 2005. Indeed, some 53% of leases (by net lettable area) are being renewed over the three years covering 2007- 09 a period we would consider to be the strongest point in the current office reversionary cycle.

– Brighter prospects for rents and asset values. We have upgraded our outlook for the office market following the significant drop in vacancy in 2006, and strong rental growth in 1Q07. Office vacancy in the Raffles Place precinct has fallen to 3.2% as at 1Q07 (latest figure from JLL), from 3.6% in 4Q06 and 8.6% in 4Q05. According to JLL, Grade A rents in the Raffles precinct increased by 22.9% q-q to S$11.80psf. CBRE estimates that Grade A rents rose by 21.4% q-q to S$10.60psf. We forecast rents will rise by 30.5% in 2007F (versus 15.9% previously) and 15.1% in 2008F (from 11.0% previously) to S$14.51psf. We expect rentals to peak in 1H09, broaching S$14.50psf, given expectations of new supply in 2010-13F.