Keppel Land - Downside risk to office rents and capital values

Potential capital raising: Given the funding requirements of Keppel Land’s ongoing developments, we believe that the company will need to come back to the market for equity. We estimate that the group will require S$1bn to strengthen its existing balance sheet and fund current investments.

Downside risk to office rents and capital values: Given the expectation of demand contraction and massive supply slated to come onstream, we now expect rentals to decline faster than previously expected and forecast Grade- A office rents to fall to S$8 psf pm, S$5 psf pm and S$4 psf pm in 2009, 2010 and 2011 respectively. On the back of falling forward rentals, we are forecasting capital values to fall to S$1,200psf in 2009 and S$800psf in 2010. In particular, Keppel Land’s key office assets will be completed when supply risk is close to or at its peak.

Deferral of projects: Keppel Land has announced that it will be deferring the construction of Madison Residences. At the full year results management has guided that it was reviewing all current and planned development projects with the intention to delay those which no longer add value under current market conditions.

Office market recovers: If both rents and capital values for the office sector remain strong, Keppel Land would benefit the most, given its extensive exposure to Singapore office sector.

Economic recovery and revival of the property market: If economic conditions improve, the health of the property market is expected to get better too.

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