Falling house prices may not bode well for major residential developers Mirvac and Stockland but diversification within the businesses will cushion potential blows from weaker sales and settlements, analysts say.
Among the analysts, UBS has taken the most bearish stance against Mirvac and Stockland’s future performance, forecasting weak results for both companies on the back of higher apartment settlement defaults and land purchase cancellations as falling house prices in Sydney and Melbourne cause buyer jitters.
It also warned the riskiest projects for Mirvac are its apartment projects in Marrickville, Sydney Olympic Park and St Leonards in Sydney.
As apartment sales take up a larger proportion of Mirvac’s earnings compared to other apartment developers such as Lendlease – around 30 per cent – UBS has maintained a “sell” rating on the company. For Stockland, it remains neutral.
“With further falls expected, we consider risk to apartment settlements for Mirvac, Lendlease and land cancellation rates for Mirvac and Stockland,” UBS analysts Grant McCasker and James Druce said in a note on Wednesday.
“We expect pre-sales and net deposits to disappoint at the February [half-year] results and concerns over cancellation rates to increase through 2019.”
Strong office portfolios
Macquarie Wealth Management however takes a different approach, saying Mirvac in particular will reap rewards from its strong office portfolio, earning passive income between 2019 and 2022 as residential development slows.
“While residential earnings represent about 32 per cent of group earnings at the moment, we note the group has a clear medium-term strategy to shift the business to 85 to 90 per cent passive or rent-collecting earnings,” Macquarie said in a note earlier this week.
Even though the group is unlikely to achieve an above-average performance, Macquarie has stood by its “outperform” rating for Mirvac confident of its strength among its peers and its ability to restock its residential pipeline to increase earnings further down the track.
Morningstar takes the same view that its office and retail portfolio will hold Mirvac in good stead.
Mirvac head of residential Stuart Penklis caveats UBS, saying that while the firm is cautious of the soft market conditions, it is confident its buyers see value in its apartments.
“We are monitoring the changing residential market conditions closely and it is important to remember that ‘average’ price changes mask significant differentiation between submarkets and housing type,” Mr Penklis said.
“At this point in the cycle, customers will recognise that not all residential product is created equal.”
“We believe that our disciplined approach to restocking, our commitment to design excellence, a quality product, and customer care will continue to differentiate us from others in the market.”
Citigroup will look toward half-year results for a confirmation on how things are faring for Mirvac and Stockland.
For Stockland, the magic number is 1300 lots sales in the second quarter, Citigroup adds. If more than 1300 lots are sold in the second quarter, the market could be recovering while less than 1000 sales would be dire to its future earnings.
Lendlease has few residential projects coming up after it settles 1400 units in Darling Quarter, Sydney this year, so a downturn in housing will not hurt the group as much as Mirvac and Stockland. But the problem for Lendlease is its engineering business, Citigroup says.
“Given the problems engineering has caused Lendlease over the last decade we expect the division to be labelled non-core at the result,” the bank said.
“Whilst the infrastructure pipeline in Australia is still favourable, given the uncertainty this business continues to create for an otherwise attractive platform we think the market will reward this reclassification.”