Germany wanting Timor for naval bases is pretty valid point, considering that Germany (Titpitz) wanted Samoa for the same reasons (Naval bases), giving up claims to the Volta Delta in Africa in 1899.
http://books.google.com/books?id=08fRAAAAMAAJ&pg=PA111&lpg=PA111&dq=Tirpitz+Samoa+Volta+Delta&source=bl&ots=y1Z2IJEAi7&sig=Y1vNdkZY8xGUjrKQAVnnCUE_7ps&hl=en&sa=X&ei=D4DQUJ__OsXs2QWi94CYAg&ved=0CC8Q6AEwAA#v=onepage&q=Tirpitz%20Samoa%20Volta%20Delta&f=false
Of course the Heligoland treaty 1890 is the same way (giving up African territory for bases). So there is a pattern.
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Despite the historical reality of the agreement not happening due to world war 1, its seems likely to happen without World War 1.
Advantages to Britain:
1) If Germany is satisfied with this, and is kept busy trying to colonize this vast area, and no longer has a chip on her shoulder about her place in the sun, and has no need to pursue large naval building projects, Britains peace and prosperity is ensured for the 20th century.
2) More colonial booty for Britain is gained too.
Disadvantages to Britain:
1) An ally is made mad, but Portugal is not a valuable ally any more.
2) Some muddying of her reputation, but the Boer war for example is in the not too distant past, so this is just one in the series of such things (and is this really a whole lot different than the USA looting the Spanish for colonies 1898).
3) A potential strong enemy has more colonial territory (but considering Britains naval preponderance, not so much a risk)