Stockland cautions interest rate hikes to temper housing market conditions

House sales are still strong but the environment will moderate once the Reserve Bank lifts rates.

Stockland, led by Tarun Gupta, has warned that strong market conditions will moderate as interest rates rise. Picture: Jane Dempster/The Australian

The country’s largest residential developer Stockland has warned that strong market conditions will moderate as interest rates rise with a series of hikes expected later this year.

The company is still riding a wave of strong inquiry and more first homebuyers are expected to be dragged into the market as government incentives are expanded but the property major has signalled that the boom days may be drawing to a close.

Stockland’s residential division is now targeting close to 6000 settlements this financial year after some lots were delayed due to rain, with the Aura project in Queensland hit.

It added that its new land lease estate business is also performing, despite supply chain issues and cost increases across the building industry.

Stockland chief executive Tarun Gupta flagged the group’s diversified operations as a strength and has already secured new capital partners to speed its operations.

“While Covid-19 restrictions and extreme weather events impacted various states during the quarter, we have maintained solid operational metrics whilst progressing our strategic priorities to rebalance our portfolio, accelerate the development pipeline, and scale capital partnerships to generate long-term sustainable growth,” he said.

Stockland said on Thursday that inquiry levels across the residential business remain elevated and well above historical levels, and was seeing positive price momentum at its land estates.

The company’s net sales of 1,562 in the third quarter were in line with expectations, reflecting the trade out of key projects in NSW, as well as the timing of new project launches skewed to this quarter.

Stockland communities boss Andrew Whitson said there was considerable unsatisfied purchaser demand, given the supply constraints experienced over the last 12 months.

“Current market fundamentals remain positive; however, we expect the strength of market conditions to moderate over the medium term in line with rising interest rates,” he said.

Like other housing companies, Stockland has been hit by supply and labour disruptions due to ongoing Covid-19 restrictions and heavy rain along the eastern seaboard. But it said the impact of cost inflation has been more than offset by price growth and contingency allowances.

Stockland said underlying price growth and the deferral of some settlements into the next financial year was expected to result in a higher operating profit margin in this half than previously anticipated.

The company kept its Funds From Operations per security guidance range at 35.1 to 35.6 cents, in line with earlier guidance, with a distribution per security to be within target payout ratio of 75 per cent to 85 per cent.

Stockland’s shopping centre portfolio saw a lift in total comparable sales of 2.8 per cent in the third quarter, while comparable specialty sales rose by 1.5 per cent.

Despite pandemic challenges and the extension of the Morrison leasing code to June, the portfolio maintained positive leasing spreads over the quarter, with rent collection and portfolio occupancy remaining high.

The company also completed the disposal of Stockland Cairns, Queensland, for $146m, in line with book value and confirmed a report in the Australian that it was exploring capital partnership for its retail essentials portfolio.

Morgan Stanley analyst Lauren Berry said Stockland’s active strategy remains on track with its land lease partnership to complete in this quarter and its $987m sale of its retirement unit to settle within six months.

“We remain overweight based on Stockland‘s strategy shift into commercial developments, which should buoy earnings despite residential softening,” Ms Berry said.

Stockland shares were up 10c to $4.20 on the ASX.