Land boom in Sydney delivers profit boost for Brickworks

Brickworks shares soar as it looks set to nearly double annual earnings, helped in part by a boost in property trust valuations.

Brickworks sales have been particularly strong in Queensland and Western Australia. Picture: Colin Murty

Large parcels of industrial land purchased around western Sydney in the 1950s for as little as $10 a square metre have today delivered its owner Brickworks a $100m profit boost and earnings upgrade, sending shares in the brickmaker and property developer soaring.

Once used for clay reserves to feed its bricks and building products business, Brickworks and Goodman Group later turned the land into the cornerstone of its industrial property trust worth roughly $2.2bn presently.

On Wednesday Brickworks revealed that the huge appetite for prime industrial land, especially in western Sydney which has become a hotspot of activity such as Amazon building a new robotic fulfilment centre, has generated a buying frenzy that had pushed up valuations to record levels.

Brickworks managing director Lindsay Partridge told The Australian that in particular recent Sydney industrial land purchases made by US investment giant Blackstone had pushed cap rates — the industry tool used to value property based on sale and rent — to as low as 3, which forced Brickworks to revalue its own holdings.

“Blackstone bought a lot of industrial land, that drove cap rates down into the 3’s and that is what has spurred this along,” Mr Partridge said.

“There is no question that when the Amazon building when complete, a 20-year lease with a trillion dollar company will be the lowest cap rate of any industrial building in Australia.”

The Amazon building is on Brickworks and Goodman’s land.

Brickworks said a significant revaluation profit within its joint venture Industrial Property Trust would see Brickworks’ share expected to be around $100m this year. This will contribute to record property underlying earnings before interest and tax (EBIT) of $240-260m for fiscal 2021, up from $129m in the prior year.

The bulk of the joint venture’s land was in western Sydney, but Mr Partridge said there was an opportunity to grow out to other regions hungry for industrial property sites.

“We have land in Brisbane as well, we are looking at doing another one in Craigieburn on the northern side of Melbourne so in the end we will have a property trust that spans the east coast of Australia and you never know where else it might go.”

The market rejoiced at the profit uplift, sending Brickworks shares almost 14 per cent higher before closing up 11.3 per cent at $23.40.

The nation’s largest brickmaker, Brickworks, also reported on Wednesday a gathering sales momentum for its building products division in both Australia and the US as an uptick in housing approvals was translating into increased building activity.

Although availability of materials in Australia such as timber was delaying some work. In the US the strong uptake of vaccines was helping to generate higher building activity.

Brickworks owns a large building products arm in Australia and the US, where it is the fourth biggest brickmaker in North America, as well as a $2.2bn property just venture and a 39.4 per cent shareholding in Washington H. Soul Pattinson.

The company revealed that the steep rise in property valuations and auction results had helped drive a property revaluation for its Property Trust that would feed into a profit boost for 2021.

Mr Partridge said the company has seen strong demand and sustained growth in the value of its Property Trust over a number of years, with the Covid-19 pandemic fuelling this growth by accelerating industry trends towards online shopping and increasing the importance of well-located distribution hubs and sophisticated supply chain solutions.

Turning to its building products operations, Mr Partridge said in Australia sales were particularly strong in Queensland and Western Australia over recent months.

“That said, the availability of some materials, such as timber for house trusses, is an issue in some areas, with the resultant delays likely to flatten and extend the duration of the existing pipeline of work.

“We expect EBIT from Building Products Australia to finish fiscal 2021 higher than last year, noting that EBIT in the prior year included a significant write-back of costs to take into account the impact of the Covid-19 pandemic.”

Operations in North America have been harder hit by the pandemic, particularly in the first half, however, with the vaccine program in the US well advanced, building activity is now ramping up.

“We have seen a strong rebound in sales volume to our housing customers in May, with this segment currently making up around 60 per cent of total sales. Pleasingly, we are now meeting the sales targets set at the time of the Redland Brick acquisition, prior to the pandemic.

“Based on the current momentum and including earnings from the sale of our York facility, we expect US dollar EBIT from Building Products North America to finish the year higher than 2020, despite the lower first half”.

Brickworks CEO Lindsay Partridge. Picture: AAP