Singapore Land - Revaluation deficits and likely write-down at Trizon

While Singapore reported a real GDP decline of 10.1% y-y in 1Q09, the rate was cushioned by inventory rebuild, which added 4.6pp to growth. More important, domestic final demand and net exports together subtracted a hefty 14.7pp from GDP, even more than the 13.1pp drain off 4Q08 GDP. The slowing domestic economy has resulted in a faster-than-expected contraction in net demand. Over the past six quarters, net demand in the Singapore CBD has contracted by 813,008 sf, with a 1Q09 net contraction of 558,418sf. As demand is weaker than expected, we maintain our bearish expectations for office rents, expecting them to fall 57% over the cycle.

Capital values since the market peak, according to JLL, have fallen by 27.6%, and further downside is likely given the slide in rents. Recent transaction and valuation evidence in Singapore suggests that office values are down by around 35% since the peak. Indeed, Anson House was reportedly sold in recent weeks for S$85mn (equivalent to S$1,100/psf), down from the S$129.5mn (S$1,701/psf) achieved in 4Q07, a fall of 34.4%. Similarly, Parakou Building recently sold for a reported S$81.4mn (S$1,280/psf), down from S$128mn achieved in 2Q07, a fall of 36.4%. In its recent 1Q09 results announcement, Fraser Commercial Trust flagged a revised valuation of its Keypoint office building at S$294mn (S$941/psf), versus its acquisition price of S$370mn in 4Q07 (S$1,186/psf), a fall of 20.5%. On 22 May, CapitaCommercial Trust flagged a revaluation of its portfolio, with key assets in the portfolio down by up to 18% since the June 2008 peak.

Notable revaluations in CCT’s portfolio included Starhub Centre (down 18.4%), 6 Battery Road (down 17.9%) and Capital Tower (down 11.9%). Given the movements in the market, Singapore Land faces reassessment of its asset valuations, as well. On our numbers, we value its investment portfolio at S$2.9bn versus an end-FY08 book value of S$4.4bn, implying the potential for the booking of a revaluation deficit of S$1.5bn, a fall of 34.9%.

We have broadly maintained our core earnings assumptions since our last note on Singapore Land, although our more positive assessment of the China residential market results in a slight bump up in earnings from its Chengdu project. We have rolled forward our intrinsic SOTP NAV to FY10F to derive a value of S$7.45/share. Not withstanding the market’s recent appetite for risk, we see further downside risks to asset prices and, consequently, to earnings. Thus, we applied mid-cycle discounts to the NAV to derive our FY10F price target of S$4.74/share.

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