Singapore Land rentals and sales to remain in a tailspin

Both major revenue streams are facing difficulties in 2012 that will be hard to surmount.

SingLand's office properties are losing value, posting a 2.5% revaluation loss in 2H11, and office demand is not picking up fast enough to arrest a negative rental reversion.

Meanwhile, sales for some of residential properties like The Archipelago remain well below potential.

Here's more from Maybank Kim Eng:

Core earnings in line. Singapore Land reported a 51% fall in its PATMI to $330.7m in FY11. Excluding full-year revaluation gains, PATMI would have shown a 5% YoY increase instead to $214.8m, in line with our expectations. More notably, its investment properties marked a 2.5% downward revaluation from 1H11, making SingLand the
first commercial landlord to report a decline in capital values. Maintain Sell as the office sector outlook remains challenging.

Office segment still the bugbear. SingLand’s gross rental income fell by 4% YoY on negative rental reversion. It also suffered a revaluation loss of $114.4m in 2H11 as the value of its investment property portfolio fell by 2.5%. We expect office demand this year to remain tepid even as asking rents slide, continuing the trend of negative rental reversion, particularly for SingLand’s older Grade A and Grade B developments.

SingLand’s hotel earnings may also take a temporary hit as the Pan Pacific Hotel is scheduled for a three-month closure for upgrading works. Residential sales no less challenging. Residential sales accounted for 20% of SingLand’s gross profits in FY11, double that of FY10, as profits from the 83%-sold The Trizon were progressively recognised. However, sales at The Archipelago at Bedok Reservoir, a 50:50 joint venture with UOL, were unimpressive. To date, only 23% of the total 577 units have been sold, possibly because supply in the Bedok Reservoir area has become saturated in recent years.

Jousting for Jervois. Seemingly undeterred by the sales progress of its existing projects, SingLand secured a 0.8ha site at Jervois Road for $118.9m or $880.7 psf ppr, in a tender under the Government Land Sales programme that attracted 18 bids. The site, located about 800m away from the Redhill MRT station, can yield around 140 units. We estimate the breakeven at $1,330 psf, with a potential ASP of $1,550 psf for a 14.2% pre-tax margin.

Prospects unattractive, TP trimmed. Given the expected slim margins for SingLand’s residential developments and the challenging office sector outlook, we maintain our Sell recommendation. We also trim our target price to $4.86, pegged at a 50% discount to its RNAV.