Stockland rides residential boom with sales surge

The developer says home inquiries are running 40pc ahead of normal and the conditions are set to continue ‘for some time’.

Stockland says it is headed for the top end of its earnings guidance.

The country’s largest residential developer, Stockland, says inquiries are running 40 per cent ahead of normal as it rides the tide of low interest rates and government stimulus.

In a bullish first quarter update, the company said that it was headed to the top end of its earnings guidance and was on track to settle 6300 home lots this year.

Stockland chief executive Mark Steinert said the company had come through the worst of the coronavirus crisis and was now firing, although the company’s shares slipped 2.4 per cent to close at $4.51 as some investors hoped for a larger upgrade.

“Importantly as the economic and business environment has improved towards pre-COVID levels, industry support measures such as the Commercial Code of Conduct and HomeBuilder concluded at the end of the quarter without emerging evidence of material adverse outcomes,” Mr Steinert said.

But he rejected calls for macroprudential measures to slow the runaway housing market and instead urged a focus on measures to address long-running supply issues.

The Stockland boss said that the Australian Prudential Regulation Authority and the Reserve Bank looked at credit growth, debt levels and high loan to value ratio loans when assessing the housing market.

Mr Steinert said investor activity was at historically low levels and household savings had increased over the last 12 months with borrowers also paying down loans.

“The regulators are quite comfortable with the quality of loans that have been made so the normal triggers for macroprudential responses are not there at the moment,” he said.

While credit growth has started to trend up in housing it was still declining in apartments, he said. House prices in the top five cities had also simply returned to levels of two years ago at a time of low rates.

“This is the best affordability in all the key markets that we’ve seen in a decade,” he said.

Westpac economists Bill Evans and Matthew Hassan on Tuesday accelerated their forecast for a 20 per cent gain in dwelling price forecasts for 2021 and 2022 from 10 per cent gains expected in both years.

“We now expect more of this rise to come in 2021, retaining the 20 per cent call overall but with a 15 per cent gain in 2021 slowing to 5 per cent in 2022,” they said.

Mr Steinert said even if there were macroprudential responses they normally involved restrictions on loan to value ratios, the percentage of investor loans, or stress testing.

“Historically, those measures, as they’re applied, tend to moderate the market, they don’t cause the market to collapse,” he said.

Mr Steinert harked back to banking royal commission related restrictions on credit that kept first home buyers out of the market, saying that credit availability has since eased.

“We think there‘s a lot of owner occupied demand and first time buyer demand that ultimately ended up being deferred, and it’s that demand that really got stimulated by HomeBuilder, and by the improved availability of credit,” he said.

“We think the market at the moment is broadly balanced and as we move into 2023 it is going to move back into under supply,” he said, ”The position of the market back in that 2018-19 period was clear under supply.”

Mr Steinert warned that Sydney and southeast Queensland were the most supply constrained markets, with the NSW capital left with only about five years worth of serviced land.

“If we are going to try to ensure that affordability doesn’t get too pressurised, you are going to have to see a co-ordinated response from the government on planning and infrastructure delivery,” he said. Southeast Queensland was more affected by planning issues.

In the March quarter, Stockland’s higher residential business inquiries translated into a strong net sales result of 1891 lots, up 69 per cent on the same time last year.

The company is forecasting residential settlements for the full year of around 6300 lots and cited supportive conditions including low interest rates, government incentives and credit availability, which have created a demand lift that developers have scrambled to meet.

Stockland said the bullish conditions were forecast to continue for “some time, even with the conclusion of HomeBuilder, given the equilibrium of supply and demand in most housing sub-markets we operate in”.

It also cited improvements in retail trading conditions, demonstrating the positive impact of Australia’s pandemic response with sales levels and store openings increasing to around pre-COVID levels.

The company’s shopping portfolio also had like-for-like retail sales growth of 3.2 per cent, while specialty sales growth leapt by 9.4 per cent as the economy rebounds, with most pandemic rent deals now sorted out.

The company had residential settlements of 1510 lots in the quarter and made 1891 net sales, giving it 4739 contracts on hand, helping to lock in future earnings.

Sales inquiry levels jumped to 33,000 in the quarter, about 40 per cent above the long term average, with Stockland picking up market share as customers jump into the market due to high credit availability and household savings.

Stockland said that given the HomeBuilder program ended in March it estimated only 10 per cent of the lots exchanged in that month were eligible for the government subsidy.

During the quarter, the business settled 1510 lots and about 3100 lots are due to settle next financial year, providing good earnings visibility.

Stockland said it was “well positioned” to meet the demand of the “up cycle” with about 70 per cent of its 81,000 lot land bank activated with a major skew to growth areas on the eastern seaboard.

In February, Stockland gave funds from operations and distribution guidance for this financial year and it is continuing to target FFO per security in the range of 16.3 cents to 16.9 cents for this half, delivering FFO per security for the full year of between 32.5 cents to 33.1 cents, in line with prior guidance.

“Importantly, the likely outcome is currently trending towards the top end of the range,” Stockland said.

The distribution for the full year is expected to be within a target payout ratio of 75 per cent to 85 per cent of FFO, albeit at the lower end of the range.