Quality assets hold edge

SINGAPORE real estate investment trusts (S-REITs) with data centre (DC) exposure could benefit from tighter supply and resilient demand as artificial intelligence (AI) infrastructure investment enters a more measured phase.

Investors are likely to favour established operators with stable rental income, manageable debt and the ability to expand without taking on excessive financial risks.

UOB Kay Hian (UOBKH) Research maintains an “overweight” call on the sector, highlighting NTT DC REIT (NTTDCR-REIT) and Keppel DC REIT (KDC-REIT) as its preferred holdings, while adopting a more cautious stance on Mapletree Industrial Trust (Mint).

The brokerage’s strategy comes as financial markets reassess whether AI can generate sufficient commercial returns to justify the enormous upfront investment in chips, DCs and power infrastructure.

Although the technology’s longer-term benefits remain intact, uncertainty over monetisation timelines and rising capital requirements is making investors more selective.

“The upfront expenditure is immediate, but the scale and timing of the eventual payoff remain uncertain,” UOBKH Research points out.

This shift is particularly challenging for smaller, highly leveraged infrastructure providers, which must invest heavily in computing hardware and facilities before generating sufficient revenue, it argues, adding that falling graphics processing unit rental prices, technological obsolescence and dependence on a handful of customers add to their risks.

The pressure is spilling into funding markets, where investors are demanding higher returns to compensate for rising debt burdens.

UOBKH Research notes that the yield on CoreWeave’s US dollar bond maturing in October 2031 briefly exceeded 16% on Oct 15, reflecting deteriorating investor confidence.

The brokerage also points to delays and setbacks in initial public offerings (IPO) as evidence that investors are becoming less willing to pay premium valuations for growth requiring substantial upfront capital.

Australia’s Firmus withdrew its planned IPO in October, while Blackstone-backed AirTrunk postponed its proposed US$1.5bil S-REIT listing, reportedly targeting completion by early 2027.

Against this backdrop, established hyperscalers such as Microsoft, Amazon and Google remain better positioned because of their diversified earnings, substantial operating cash flows and stronger access to capital markets.

However, they are not entirely insulated if cash-constrained AI customers reduce cloud spending, weakening utilisation and returns on new infrastructure.

UOBKH Research believes the infrastructure investment cycle needs more time to develop, even as demand for computing capacity continues to grow.

“We opine that the benefits of AI are real, but the investment on AI infrastructure must be paced out over many years,” it highlights.

For investors, the more immediate opportunity lies in operational DCs, where constrained new supply could strengthen existing operators’ pricing power and support the leasing of vacant space.

The pace of new development is being held back by electricity shortages, tighter financing conditions and local communities’ resistance to the environmental impact of new facilities.

These constraints limit competition from newly completed projects and improve the value proposition of established assets.

Yield appeal

NTTDCR-REIT is UOBKH Research’s preferred pick for income-focused investors, with a “buy” rating and a target price (TP) of US$1.29.

The brokerage estimates that the trust offers the highest financial year 2027 (FY27) distribution per unit (DPU) yield among its preferred names, at 9.4%.

Its relatively low gearing provides room to expand while maintaining financial flexibility. UOBKH Research puts its leverage at about 31%, with US$261mil of debt headroom before gearing reaches 40%.

The trust also has no debt maturities until FY29, giving it time to manage its funding requirements.

Another attraction is its acquisition pipeline. NTTDCR-REIT has rights of first refusal over more than 160 stabilised DCs, providing potential opportunities to expand its portfolio through its sponsor.

The trust is also seeing improvements in occupancy. Committed leases are expected to lift occupancy to 99.2%, with most new leases contributing revenue from the third quarter of FY27 (3Q27).

Proposed changes to performance fees could further improve alignment with unitholders by rewarding DPU growth above 3% and reducing dilution through management fee units priced at net asset value (NAV) or higher.

UOBKH Research says NTTDCR-REIT also has the capacity to pursue accretive acquisitions in established global DC hubs, including Frankfurt and Tokyo.

Good exposure

KDC-REIT is the brokerage’s other preferred holding, with a “buy” rating and a TP of S$2.83.

Its Singapore-centric portfolio offers exposure to a market where limited supply and demand from AI-driven co-location activities support rental growth.

Rental reversions reached 16% in the 3Q26, while net property income rose 13% year-on-year in the first nine months of FY26.

Income visibility is supported by a weighted average lease expiry of 6.5 years, measured by lettable area. Master leases for fully fitted and shell-and-core DCs also incorporate annual rental escalations of between 2% and 4%.

Beyond rental growth, asset enhancement initiatives at SGP 8, redevelopment of SGP 1 and new contracts in Australia provide avenues to expand earnings.

Sponsor Keppel’s acquisition pipeline offers further opportunities, including hyperscale DCs in Singapore and western Tokyo from 2028.

Hyperscalers account for about 70% of KDC-REIT’s rental income, underlining its exposure to established technology customers.

UOBKH Research considers the trust well supported by its sponsor, with the combination of recurring income, contractual rental increases and development opportunities helping to underpin its longer-term prospects.

Rising headwinds

In contrast, UOBKH Research assigns Mint a “sell” rating and a TP of S$1.72, citing occupancy challenges and rising financing costs.

Occupancy fell 3.6 percentage points quarter-on-quarter (q-o-q) to 82.5% in the 1Q27 following a lease non-renewal in San Diego and tenant downsizing in Atlanta.

The full impact of the San Diego vacancy is expected to emerge in the 2Q27.

Smaller DCs serving enterprise customers account for 23.7% of gross rental income, leaving a sizeable part of the portfolio requiring repositioning as market conditions evolve.

The trust’s aggregate leverage also rose 3.5 percentage points q-o-q to 37.5% after borrowings were used to fund the redemption of S$300mil in perpetual securities.

Meanwhile, the replacement of S$600mil of interest-rate hedges expiring in FY27 at higher rates is expected to increase borrowing costs, putting further pressure on DPU.

Hyperscalers account for about 24% of gross rental income from Mint’s DC portfolio, a lower proportion than at the two preferred trusts.

With supply constraints supporting established operators and financing conditions remaining challenging for more leveraged players, UOBKH Research’s strategy favours income visibility, balance-sheet flexibility and sponsor-backed growth over expansion that depends on uncertain demand or expensive funding.