Stockland warns on housing market as it sells retirement for $1bn

New boss Tarun Gupta says immigration may be the ‘X-factor’ for the housing market, as the property group cuts ties with past failed strategies and fast tracks transformation.

New Stockland boss Tarun Gupta says immigration may be the ‘X-factor’ for the housing market. Picture: Jane Dempster/The Australian

Stockland chief executive Tarun Gupta has warned that the housing market will moderate as he unveiled a strategy shift at the property developer’s half-year results, including the near $1bn sale of its retirement unit.

Mr Gupta is looking to bring in global capital partners to work on ventures with Stockland to supercharge its returns and he unveiled new partnerships with Japan’s Mitsubishi Estate Asia and Canadian group Ivanhoe Cambridge.

Investors embraced the changes with Stockland shares up 3.7 per cent to $4.16 but the company, which is the country’s largest listed residential developer, sounded a cautious note on the housing market.

Mr Gupta said that demand was still at the elevated levels seen over the last 12 to 18 months but said affordability constraints were coming into play.

“We do anticipate demand to moderate in Sydney and Melbourne, only because price rises have been so significant and affordability is becoming more challenging, especially if there is, as anticipated, some interest rate rises,” he said.

But he still sees strong demand in southeast Queensland and Perth as it opens up, saying there was “quite a bit of runway in those two states”.

He is also hopeful longer-term although housing costs are rising.

“I think the other X Factor now if you look out to the medium term is we’ve had a very good run in the last two to three years during Covid with no immigration. Immigrants are starting to come back and typically they start buying two to three years from arriving. That’s a factor that will play into the housing market but overall, I would call out affordability starting to become more of an issue in Sydney and Melbourne,” Mr Gupta said.

Stockland is hoping for higher returns by setting up partnerships with Mr Gupta saying the company will be receiving quality recurring income from its moves.

In the most dramatic shift, Stockland revealed it has sold off its retirement portfolio to EQT Infrastructure and struck up the partnership on its expanding land lease activities with the Japanese company.

The retirement unit was sold for $987m – a small 1.9 per cent discount to its book value – although Stockland said it was performing well.

Canadian heavyweight Ivanhoe Cambridge will back a $2bn life sciences and technology precinct in Sydney’s Macquarie Park.

Both plays have come as Mr Gupta, a former Lendlease executive, consigns Stockland’s failed 3R’s strategy – with its focus on residential, retail and retirement – to history and looks to soup up returns with more joint ventures.

The moves will accelerate Stockland’s commercial business and come as it also grew its land estate business to 82,000 lots, alongside the growing land lease portfolio which has hit 9000 home sites.

The company’s profit jumped by 150 per cent to $850m in the first half, mainly on the back of its investment property portfolio rising in value.

But Funds From Operations, a measure of earnings, fell in the first half by 9.3 per cent to $350m and FFO per share also dropped to 14.7 cents.

Stockland said it expects the timing of profits to be skewed to this half reflecting settlements in its estates and the settlement of its retirement unit. It also copped $19m in Covid related rental impacts.

Stockland said it remained optimistic about the country’s ability to adapt to Covid-19 market conditions, noting that conditions remain volatile but it had good visibility about this half.

The solid operational performance over the first half positioned it for a stronger second half and it tightened its guidance range, saying its expected distribution per security for fiscal 2022 would be within its target payout ratio of 75 per cent to 85 per cent of FFO.

Stockland now expects FFO per security of 35.1c to 35.6c this financial year, a tighter range than the previous 34.6c to 35.6c a security.

Guidance is dependent on residential settlements hitting about 6000 land lots and operating profit margins in the unit being above 18 per cent.