Mirvac reports $201m loss as it looks to rebound from rapid increase in interest rates

The construction group swung to a first-half loss with a lack of builders keeping costs high, but it expects confidence in the property market to return as interest rates fall.

Mirvac says a peak in interest rates and the prospect of rate cuts in the coming months will increase confidence in the property market and draw a line in the sand for the group as it looks to rebound from a sharp reversal in profit.

Higher financing costs from the RBA’s aggressive run of rate rises cut operating profit by 17 per cent to $252m in the December half, which was better than markets had expected. A $396m hit to the valuations of investment properties led to a statutory loss of $201m compared to a profit of $215m a year prior.

Despite headwinds from higher borrowing costs and subdued residential demand, the group kept its earnings guidance unchanged for the remainder of the 2024 fiscal year.

Mirvac group chief executive Campbell Hanan said building costs were stabilising after a surge in the past two years from supply chain issues and Covid-19, but a shortage of builders was making it more expensive to build but more migration would help relieve pressure.

“A lot of infrastructure projects and a greater desire for more housing is resulting in a labour shortage,” he said. “Having a smaller pool of workers to go around will keep those costs high.”

Mirvac group chief executive officer of Mirvac Campbell Hanan says that a peak in interest rates will be good for the company. Picture: NCA NewsWire / Nikki Short

“We will be the first to say that if we could increase immigration in the construction sector that will be a good thing. In the industry a lot of subcontractors that rely on labour to fulfil their obligation are struggling to maintain staff.”

With economists expecting that the cash rate has peaked at 4.35 per cent and that the RBA could cut rates later in the year, Mr Hanan said that Mirvac will benefit and is positioned to capitalise on a market recovery across all of its operating segments.

“We have seen the impact of what increases rates have done to earnings, so it will draw a line in the sand on the negative impact rates have had on earnings,” he said.

“It will also bring back confidence into the market – people borrowing money will have more confidence that they will be able to withstand what is happening and that will lead to more interesting.”

Mirvac had an occupancy rate of 96.9 per cent in its investment portfolio and leased 90,000sqm of net lettable area across Office, Industrial and Retail. High levels of occupancy in office towers was the result of businesses making the flight to quality for office space and a slowdown in companies giving up office space after a post-Covid trend driven by work from home.

Mr Hanan said that the quality of its projects completed in the past few years had positioned it well in the office market with occupancy rates above trend in Sydney and Melbourne.

“We have built 10 office towers in the past six years and they are largely full — so we are benefiting from the flight to quality,” he said.

“The whole conversation about work from home versus office has passed us. Corporate Australia understands what its footprint now needs to be and those decisions about handing back space are done.”

Mirvac continues to see good level of interest in its residential projects.

Mirvac settled 1,131 residential lots and continued to see good levels of inquiry at projects, while its residential default rate widened to 0.7 per cent from 0.1 per cent at the end of the 2023 fiscal year.

Mirvac said it will continue with a push into build-to-rent and land lease, which it says will help to make housing more affordable and accessible to Australians.

Investors reacted well to the result, which came in slightly better than analysts had expected, with shares up 5.4 per cent to $2.26 on Thursday.

UBS analyst Tom Bodor said that the result was better than feared with no downgrade to guidance, while Jarden analyst Lou Pirenc said guidance for the 2024 fiscal year suggested a 9 to 13 per cent growth in the second half.

“Based on development activity, this will likely require a significant pick up in market conditions,” Mr Pirenc said.

“This result looks okay to us and we see Mirvac as being in a strong position to benefit from a more stable (or lower) interest rate environment.”

Subject to no material change in the operating environment and to delivering on key initiatives, Mr Hanan reaffirmed guidance of operating earnings per security of 14.0-14.3c in the 2024 financial year and distribution per security of at least 10.5c.

Mirvac cut its interim dividend to 4.5c a share from 5.2c a year earlier.