Mirvac will suffer more than listed rival Stockland as the investor market weakens, investment bank UBS says in a new note, maintaining its “sell” recommendation on the developer.
With investors comprising one-third of Mirvac’s buyers and NSW accounting for one-third of its future revenue, a likely further decline in investor activity would hit the developer hard, UBS analysts wrote on Monday in a report, Which housing scenario is priced in?
“We see a likelihood an important cog in Mirvac’s residential engine, the Sydney investor, will crack. Further, the slowdown in the apartment market is not fully reflected in consensus earnings, in our view,” they wrote.
“We see the market effectively pricing in most of our base case of a housing correction. Near term, we believe the risk remains to the downside.”
Sydney property values have now fallen 9.5 per cent since they peaked in July last year and with “no circuit breaker” in sight, will likely surpass the largest downturn on record, CoreLogic said separately on Monday. As many as half of all buyers in NSW are investors, UBS said.
It maintained its “sell” rating on the stock.
Mirvac’s counterpart Stockland previously took a hit in October after Morgan Stanley said slowing lot sales could reduce Stockland’s housing settlements in 2020. Stockland, however, sells 80 per cent of its homes to owner occupiers.
“Risks are building, for example high household debt and falling house prices. We remain cautious on Stockland and Mirvac,” UBS said.
“A combination of increased verification of mortgage applications, comprehensive credit reporting and restrictions on high “debt-to-income” loans are set to restrict housing credit growth.
“Underperformance has so far tracked credit flow data, suggesting more downside if a target 20 per cent [fall in home loans] is realised.”
Lack of information
UBS described Mirvac’s funds from operations as “average for the past four years”. Reporting earnings in August, Mirvac said growth in FFO – an industry standard measure of revenue – rose 9 per cent to $608 million from the previous year.
The banking royal commission will hit hard when findings are released in February, as will a likely removal of negative gearing if Labor wins the federal election next year, UBS said.
But for ASX-listed Mirvac, trouble brewing in new apartment sales rates is most concerning. UBS said it was anticipating sales of only one apartment a month.
During the boom, entire projects of 200 to 300 apartments sold out in a day.
“One of the key reasons why we haven’t seen consensus move more, in our view, is a lack of information around apartment sales rates,” UBS said.
“Mirvac’s quarterly disclosed no relevant information on apartment sales rates and Mirvac has not released formal information on sales rates of their sole release, the Amber at Sydney Olympic Park.”