Analyst warns SingLand of looming downward pressure to office rents next year

Event
Singapore Land trumped the consensus by announcing a 3Q11 net profit of $56.6m, which represented a 3% QoQ and 13% YoY increase. Revenue from Pan Pacific Hotel continued to strengthen, partially offsetting the YoY decline in rental income from investment properties. Office rents, however, could remain under downward pressure in view of the uncertain economic conditions. We reiterate our SELL recommendation.

Our View
On a YoY basis, SingLand’s gross rental income slipped by 5% on negative rental reversion. However, on a sequential basis, the portfolio remained resilient, beating expectations with a 1% QoQ rise. In 3Q11, office spot rents remained largely flat, and we understand that signing rents at SingLand Tower ranged from $9 psf to $11 psf pm during that period. However, we maintain our belief that office rents will come under more substantial downward pressure next year, particularly if GDP growth falls below 3% in 2012.

SingLand’s hotel portfolio posted a creditable performance in 3Q11, perhaps aided by the Singapore F1 Grand Prix held late last month. The Pan Pacific Singapore enjoyed a 9% QoQ and 15% YoY growth in revenue due to higher room and occupancy rates, as well as higher F&B sales. While the strong hotel performance would likely shore up falling office rents, rental income still accounts for more than 60% of the group’s gross profits.

SingLand and JV partner UOL are expected to launch the condominium at Bedok Reservoir Road in the next 1‐2 months. We estimate ASP to be $1,100 psf on a breakeven cost of $900 psf. However, that area has seen a number of new projects in recent years, such as F&N’s Waterfront Gold and the DBSS project Belvia, and it remains to be seen if upgraders’ demand there has reached saturation point.