Mirvac flags tough outlook after $805m loss as cost squeeze hits apartments

Property developer Mirvac was hit by a sharemarket sell-off on Thursday after issuing disappointing earnings guidance which could reverberate across the listed property sector.

Mirvac boss Campbell Hanan. Picture: Nikki Short/NCA NewsWire

Property developer Mirvac was hit by a sharemarket sell-off on Thursday after issuing disappointing earnings guidance which could reverberate across the listed property sector.

The company fell to an $805m full-year loss on the back of a drop in the value of its office portfolio and warned that earnings will be hit due to tough conditions for developing high-rise projects started during the pandemic.

Mirvac shares slumped 9 per cent to close at $1.92 per cent on the back of the weak guidance as it surprised the market as the first major Australian real estate investment trust to disappoint investors this earnings season.

Investors concerned that the company’s woes could be replicated across the sector sold down stocks exposed to the residential market, where cost blowouts resulting from higher interest rates and subcontractor collapses are now coming home to roost.

Euree Asset Management property director Winston Sammut noted the implications for the sector as other developers were sold off. “The market has taken it as an indicator of what is likely to occur for when their results come through,” he said.

“We’re going to see … lower expectations,” he said.

“The outlook should be getting better, given that rates are going to be cut. But I think the next couple of months are still going to be ­volatile.”

Mirvac said it was targeting operating earnings this financial year of 12c-12.3c per security and a distribution of 9c per security, down from last year’s 14c and 10.5c respectively, and well below market expectations.

CEO Campbell Hanan said the lower earnings would reflect the impact of a lower contribution from the company’s development business and higher net interest costs related to projects.

“This includes lower margins at selected Queensland and NSW apartments projects. However, we expect the next phase of ­apartment projects to return to our normal target range,” he said.

Mr Hanan said market conditions were likely to remain “challenging” this year but said the company was preparing for recovery. “We have operated through numerous property cycles over the past 52 years, and our success lies in our ability to navigate through the challenges and adapt to market conditions,” he said.

The group insisted that its integrated model of development, building and funds management would set it up for the next part of the property cycle, as it had secured support for big projects like the 55 Pitt St office skyscraper in Sydney.

Mr Hanan said the group’s challenges had been driven by poor margins from apartment projects and rising development costs. But he was bullish about the potential for a recovery in coming years. “We now have a really significant growth profile out of the other side … we are starting a whole lot of new projects and we have better margins in those ­projects,” he said.

The company must still work through about five pandemic-era projects that were taken on just as building input costs started jumping, rising by 20 to 30 per cent in Sydney and Melbourne and even more in Queensland and Western Australia.

Mirvac has new projects in Sydney, where it is selling both houses and apartments, but Mr Hanan acknowledged the challenge posed by low housing affordability, saying the issue was “real” and the proportion of first-home buyers had dropped.

The company’s operating profit dipped by 5 per cent to $552m but was in line with guidance, with the headline loss driven by $1.1bn writedowns, mainly on older office stock. The company has moved deeper into the ‘‘living sectors’’ of build-to-rent and land lease under Mr Hanan.

The company has sold off $1bn in assets, including buildings in Melbourne and Sydney, but has emphasised getting capital partners to back its projects, with Japan’s Mitsui Fudosan taking a 67 per cent interest in the $2bn Pitt St project. It also sold the Aspect North and South Industrial precincts into the Mirvac Industrial Venture, which is backed by the Australian Retirement Trust.

Mr Hanan said the company was focused on improving the cashflow resilience of its investment portfolio, maintaining balance sheet strength, growing its third-party capital relationships, and leveraging its development capability to deliver quality, modern assets to hold for the long term. The group sold buildings including 60 Margaret St and 40 Miller St in Sydney, and 383 La Trobe St and 367 Collins St in Melbourne, as well as Cooleman Court, Canberra.

The group’s housing unit performed well, with residential earnings before interest and tax jumping 36 per cent to $212m on the back of settlements at its Sydney-based apartment projects, increased housing estate settle­ments in Perth, and settlements from its first release at Cobbitty in Sydney.

Margins fell to 17 per cent, hit by cost pressures from inclement weather and subcontractor in­solvencies.

The company exchanged 1509 lots over the year, as sales were hit by uncertainty over interest rates, fewer product launches and lower first homebuyer activity.

Mirvac has $1.3bn of pre-sales on hand, skewed to upgraders and right-sizes, which are the stronger parts of the market, but defaults increased to 2.3 per cent, driven by its housing estates.

Mr Hanan noted the residential gross margin was below the long-term target of 18 to 22 per cent, as it was hit by higher costs across apartment projects in NSW, and the problems were also expected to hit its Queensland apartments.

“Despite this we are starting to see green shoots of market activity, with elevated inquiry and strong sales success at recent project launches,” he said.

Jarden analysts said the results were broadly in line with expectations but helped by $146m of development profits in commercial, which can be volatile, suggesting the underlying performance was weaker than expected.

They said that the guidance for fiscal 2025 was down 13 per cent year on year and below expectations, as commercial trading profits and residential earnings are likely to be well below the prior year.

They said this was partially offset by solid comparable growth in the property trust and contribution from the new build-to-rent and land lease estates.

“Residential sales and settlements remain under pressure and margins will likely be impacted by skew towards apartments and settlement delays”, Jarden said.