Keppel Land’s office rental growth down to 0% in FY12

Lower rental growth assumptions amid weakening economic outlook
The global economic outlook deteriorated over the month of August and September on the backdrop of intensified debt concerns and weaker economic outlooks amongst the developed countries. In-line with our office sector downgrade from positive to neutral, we lower our assumptions on office rental of Keppel Land, from positive 2% to 0% growth in FY12. The net impact on PATMI of FY12 and FY13 are relatively minimal at -0.4%.

Minimal impact to earnings with no change in cap rate
We expect the slow down in leasing activity to have minimal impact to Keppel Land as both its new office developments, Ocean Financial Centre and Marina Bay Financial Centre Ph 2 are strategically located in the heart of CBD with the advantageous view of the Marina Bay.

In addition, most of the leasable area has been committed or pre-committed prior to completion. It was reported by media that a further 70,000 sqft of MBFC Tower 3 were taken up by mining giant Rio Tinto at the rate of low tens. These may further allay the worry of high vacancy in its new office buildings. As we expect cap rate and cap value of office space to hold, we do not incorporate provision for downward revaluation at this moment.

Brisk sales at Sengkang residential project
Keppel Land launched its mass market project The Luxurie at Sengkang in August, just five months after it clinched the site in a Government Land Sale tender in March. According to a company statement, more than 180 units of the 622-unit project had been sold at a median price of $980 psf as of early September. We are delighted by the sales progress considering the development is priced at c13% premium over a Sim Lian project, A Treasure Trove, near Punggol MRT Station, which according to media report is sold at ASP of $866 psf.

Maintain Hold but lower fair value from $4.18 to $3.19
We adjust our rental assumptions on its office property and sales progress of the Sengkang residential project, the RNAV is lowered from $4.92 to $4.91. We also increase the discount to RNAV from previously 15% to 35% on the weakening economic outlook and office leasing market. We maintain our Hold recommendation on Keppel Land given its exposure to the China residential market, where the government’s tightening measures on the property market are not expected to be lifted any time soon.