Lendlease predicts return to cities once crisis fades

Big cities are here to stay and the Australian developer is once again heading offshore to capitalise on opportunities.

Tony Lombardo, chief executive of Lendlease, says the company is on track to produce $8bn of projects each year.​

Global development giant Lendlease believes that cities will swing back into action as the coronavirus pandemic is brought under control as it laid out an ambitious development agenda that will see it step up production to $8b annually.

The company’s new chief Tony Lombardo said the pandemic was an “interrupter not a disrupter” saying that cities were destined to remain the centrepiece of modern society and innovation and human advancement and were critical for the global economy.

“We believe in cities and the way people organise themselves,” he said. “Think London and New York’s finance sectors, Milan’s high end manufacturing and fashion scene, Silicon Valley’s technology and Singapore’s global trading smarts.”

He cited the extensive social infrastructure and amenities that these cities offered as making them “people magnets” and Lendlease has major projects underway in many of these centres.

“Covid is having a significant but ultimately temporary impact on the way societies live, work and play,” Mr Lombardo said. He argued the company, which has exited a costly foray into engineering, had the global reach and capabilities, and partnering approach, to perform in coming years at a strategy briefing on Monday.

Lendlease is banking on big institutions backing its ability to develop mixed projects around the world, with most of this pipeline of new work overseas.

The shift will see the consolidation of Australian operations and the company will look to pour more capital into very large scale global projects.

“We expect our mixed use capabilities that span a range of sectors to be increasingly in demand, in particular for innovation districts and transport hubs,” Mr Lombardo said.

Lendlease expects traditional requirements for space to be replaced by demands for new style facilities centred on collaboration and innovation, and health and wellbeing.

The developer is swinging towards major projects in offshore markets including London and major US cities as it consolidate its local operations.

Mr Lombardo confirmed that Covid-19 had led to 12 months of delays and lower production levels but is hopeful the company can spring out of the doldrums as the world opens up.

On the residential front, the local estates business had a relatively quiet period despite the housing boom.

Mr Lombardo admitted that Lendlease had underperformed the market in the area but it has the skills to restore its performance.

“We expect sales to accelerate in fiscal 2022, boosted by the commencement of four new projects: Shoreline and Pine Valley in Queensland; Figtree Hill in NSW and Averley in Victoria,” he said.

Lendlease shares dropped by 15c to close at $12.02.

Morgan Stanley analysts Simon Chan and Lauren Berry said Lendlease’s strategy briefing was bullish in that its fiscal 2024 targets for completions and returns had been confirmed post the new CEO’s review.

“However, the less bullish points include the uncertainty around the progress of the pipeline, and the potential for fiscal 2022-23 to be unexciting years for earnings,” they said.

Morgan Stanley said Lendlease’s strategy was clear, but the company’s path was “perhaps less so”. The company is focused on hitting 10-13 per cent development returns and wants to be rolling out more than $8bn of projects by the fiscal 2024.

Investors believe that Lendlease can hit its targets as big contributions are expected from the One Sydney Harbour towers at Barangaroo and the Melbourne Quarter precinct.

But much will also depend on its smaller projects and cost cutting.

JPMorgan analyst Richard Jones said Lendlease had active projects to hit its hurdles in fiscal 2024, but the key was the sustainability of the development targets beyond this.

“If Lendlease can sustainably achieve its targets, the stock could see a material price to earnings re-rate, however it is rarely smooth sailing for development businesses, so we expect earnings volatility to persist,” he said.

The company also has ambitions to grow in funds from about $40bn to close to $70bn in coming years and Mr Lombardo said the company was launching a new opportunity vehicle, which could pursue opportunities thrown up by the crisis.

The company also flagged that it would chase large public sector projects and new specialist areas like life sciences and data centres.