Mirvac boasts of reliable delivery as construction rivals collapse
Two factors underpin Mirvac’s robust results on Thursday, as rising interest rates bite and rising construction costs send some developers to the wall.
First is the benefit of its in-house development capability, from residential to retail and commercial.
CEO Susan Lloyd-Hurwitz says it is the confidence that the top 50 ASX-listed property group can and will deliver that has maintained demand from buyers.
Second is the strategy to rotate continually out of older urban assets into future-proof assets that are greener and digitally sophisticated. In the office market Lloyd-Hurwitz describes the old and new assets as a major bifurcation for both capital investment and tenants. And while she admits that some big corporates are deferring decisions, she believes the return to the CBD will come.
Mirvac beat expectations with a $906m net profit in a busy year when floods in Brisbane forced a $216m writedown of its Toombul retail development and it took over the running of AMP’s $7.7bn office fund in July.
Lloyd-Hurwitz says in the housing market the Covid stimulus drove exceptionally high demand in 2021 and 2022 but she expects demand to continue across the spectrum, with high levels of repeat Mirvac customers.
“That gives us confidence to release another 3000 lots in 2023,” she says.
“We launched an apartment building called the Isle and we sold 50 per cent of the building in two weeks. And at established masterplan community Everleigh we sold 23 of the 25 lots on the morning we released them.”
As immigration returns Mirvac is also bullish on the apartment market, with six buildings launched in 2022 and six more planned for 2023.
For customers the critical issue is the certainty of delivering a build on time.
“Or deliver at all … because there are definitely examples now in the market of developers handing back contracts to customers, being unable to complete or even start,” Lloyd-Hurwitz says.
Mirvac’s in-house capability runs across the supply chain, from architects to development managers, property managers, leasing people and engineers, with what the CEO calls a very loyal set of tier-one subcontractors.
“That is a different model than most,” she says. “All other REITs will outsource all of that. It’s a very good time to be your own builder.
“We are in the market all the time, we have a $30bn pipeline and we are getting real time pricing which gives us a more current view of where costs actually are,” she says.
Mirvac is not beholden to the first-home buyer market. Instead it has a high level of right-sizers – people selling the family home and moving into large apartments – who are more resilient in the face of rising interest rates.
Lloyd-Hurwitz is also glass-half-full on the office market despite the reluctance of company bosses to pull workers back to the CBD. Mirvac occupancies are down just 10 per cent on pre-Covid levels.
She says businesses sitting on the fence will move because of a growing preference for modern low-capex, highly sustainable, technology-rich buildings.
“It will come but there is a still a level of uncertainty in major corporate decision making.
“People are still grappling with ‘what does the office need to do for them?’ from a strategic point of view,” she says.
Mirvac’s own risk management on rising rates suggests that management does not see sustained high inflation.
Over the next year Lloyd-Hurwitz says the team is planning for Mirvac’s average interest rate to go up from 3.4 to 4.6 per cent.
The business is 55 per cent hedged. She argues it would not be prudent to put on more hedging because the hedge price is currently above where the company thinks the interest rates will be and the exercise would destroy value. “We have we think some buffer in our interest rate book. We have a spread maturity profile and it’s a very conservatively managed book,” she says.
On the ESG front Sue Lloyd-Hurwitz has kicked two goals in the last year that will sit well with investors. On emissions Mirvac is the first major Australian property group to be net positive for scope 1 and 2, achieved nine years ahead of target. And in March Mirvac was ranked No.1 in the world for gender equality by Equileap, in a field of almost 4,000 publicly listed companies valued at over $US2bn.
Lloyd-Hurwitz jets off to see international investors for the first time in two and a half years later this week, pitching the strength of the result in challenging markets and how she is planning for the next wave of growth. She offers up three growth opportunities: industrial logistics, buoyed by a continued mismatch of supply and demand; build-to-rent, buoyed by low vacancy and immigration; and mixed use, with the growing need to use urban land more efficiently.