Big developers to benefit if rates cut: Citi

Beleaguered apartment builders are set to benefit if interest rates fall, but any bounce may be delayed, says Citi.

Developer apartments.

The country’s largest residential developers could benefit if interest rates fall and act to stimulate the housing market, according to Citi analysts.

If forecasts of steady, or even declining rates, eventuate this could provide relief for listed groups Stockland and Mirvac whose residential units are under pressure from slowing sales.

Citi said the outlook for interest rates had changed materially last year, with the market now pricing two 25 basis point rate cuts by early 2020.

This was a reversal as the analysts said it was only last November that the market was expecting the next move in the cash rate to be up.

The bank’s analysis found that interest rate cutting cycles had historically been stimulatory for residential volumes. Typically rising volumes had lagged reductions in interest rates by six months.

The prices of the listed players tended to move differently, with Mirvac and Stockland’s price to earnings multiple tending to re-rate about 30-60 days ahead of the first rate cut.

“However, these rerating periods tend to be relatively short lived,” Citi said.

The report said the market was now pricing two 25 basis point interest rate cuts over the next 12 months, as concerns increase over economic growth, inflation remains low and wages growth remains anaemic.

Citi said that rates easing cycles typically resulted in rising volumes with a six-month lag, so a second half of 2020 impact would be felt by Stockland and Mirvac.

The analysis said the historically close relationship between interest rates and housing sales had broken down over the past 12-24 months given tightening lending conditions.

Citi argued that as incremental tightening measures progressively eased, volumes could see a recovery, but not before the second half of 2020, given the traditional six-month lag effect.

Stockland’s heavier skew to land sales meant it may have the most near-term earnings leverage to a volume recovery.

Both Stockland and Mirvac’s price-to-earnings multiples expanded in three of four easing cycles since 2001.

Multiple expansion typically commences 30 days ahead of the rate cut, and peaks a relatively short time thereafter, Cti said.

Citi said there may be a short term upside in Mirvac and Stockland’s prices as potential interest rate cuts emerge. But for the long term, though, it reiterated its neutral rating on both stocks.