Keppel Land - Analyst Report - Residual Income Valuation

Essay by newton_kewlUniversity, Bachelor'sA+, February 2006

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1. Industry & Economic Characteristics

Keppel Land is basically in the business of property trading and property fund management. As of 2004, 90% of Keppel Land's revenue comes from property trading and investment. We can categorize these activities under the real estate industry.

The biggest problem with the Real Estate industry is that it is extremely uncertain. Property prices are extremely volatile and have no specific pattern. This is primarily due to 2 fundamental issues:

* Current bank accounting practices

* The time lag between demand signal and actual supply

It is these factors which create the "property bubble" .

* Time Lag between Demand Signal and Actual Supply

Property development has a cycle of 2-3 years. Owing to such a huge lag in time, it is possible that even the demand for the particular properties to change. Thus, it is possible for 10% increase in demand to produce a 50% increase in supply.

It has happened in Singapore as well when the property value's reached their peak in 1997 only to fall by 40% in 2004.

* Current Bank Accounting Practices

Consumers continuously depend on banks to finance their property purchases. Banks, on the other hand fund these purchases as an increase in their value also means an increase of the bank's assets. However, it must be noted that a bank's willingness in lending is directly proportional to the economy of the country. In times of recession, banks reduce lending sharply because property prices are going down affecting their balance sheets drastically. When this happens, few people can afford to buy property, thus posing a great problem to the real estate industry.

Now, the demand for property is primarily driven by population growth and a rising economy. Population growth in a country simply means more demand for housing. Keppel...