Stockland looks to ride “moderating” housing market

The developer says the fundamentals as it locks in enough sales to see it through the market slow down amid a 25 per cent profit jump in the past financial year

The country’s largest listed residential developer Stockland says it is on track to settle the same number of lots in its land estates this financial year as it did during the property boom despite the cooling market.

Stockland said it has locked in enough sales to see it through the market slow down even as interest rate rises were having a moderating effect on the market.

Stockland chief executive Tarun Gupta pointed to risks in the environment but said the company was well positioned.

“While macro-economic conditions remain uncertain, the underlying performance of our business segments give us good visibility for the year ahead,” he said.

“The overall macro economics are being driven by rising inflation and the resulting interest rate rises, which are still continuing,” he said.

“The RBA hasn’t finished its tightening cycle and that is impacting the broader market,” he said. “It’s starting to moderate … demand for residential products, mainly because buyers are cautious waiting for interest rates to stabilise,” he said.

Mr Gupta said the market was in a cyclical slowdown, which happened every three to four years. He pointed to areas of strength including southeast Queensland, which is benefiting from interstate migration, but noted planning and labour challenges in the state.

He said Sydney and Melbourne had been through a fantastic run over the last three years and those markets were moderating because of interest rate rises. The CEO said that market fundamentals were still strong going into the next part of the cycle as jobs were at record levels.

“We’ve got immigration starting to pick up, more migrants arriving and there is a lot of disposable income that seems to be in consumers hands. So those are all strong fundamentals. And there is really no big oversupply either in the apartments market or the land subdivision market,” he said.

Stockland turned in a 25 per cent jump in profit to $1.38bn, partly on the back of rises in its property portfolio, and its Funds From Operations lifted 8 per cent to $851m. On a FFO per security basis there was a 7.9 per cent rise to 35.7c, beating the guidance range of 35.1c to 35.6c, and the full year total distribution per security lifted by 8. 1 per cent to 26.6c.

The company said it was well-positioned with gearing at 23.4 per cent, which has dropped to about 18 per cent as the $987m sale of retirement living is completed.

The company said its town centres portfolio was faring well and it has been more resilient than CBD retail during the pandemic.

Stockland said that momentum had been maintained across in its land estates with contracts on hand up 19.4 per cent and an 18.3 per cent operating profit margin despite upward cost pressure.

The company has set up two new capital partnerships, in its land lease communities and at Sydney’s M_Park tech park development, as part of the CEO’s efforts to develop more assets with large offshore backers.

The company gave FFO per security guidance set at 36.4c to 37.4c on a pre-tax basis for this financial year, and tax payable is expected to be in the range of 5-10 per cent of pre-tax FFO.

Mr Gupta said the company‘s retail portfolio’s essentials-based mix was “providing resilience” in an inflationary environment, and it is expanding its industrial holdings.

“We are accelerating delivery of our logistics pipeline to provide additional high-quality earnings and we continue to progress our workplace development opportunities,” he said.

“Our communities business also enters the year in a strong position, with almost 6,000 masterplanned communities contracts on hand and strong embedded margins in our land bank,” Mr Gupta said.

Citi analysts said that Stockland has produced a slight fiscal 2022 earnings beat but there was weaker mix, with some potentially non-recurring items. Citi said that Stockland’s guidance may be conservative but said it had a skew to the second half.

The company had flagged it would pay tax but once this is accounted for this could leave the company’s forecast below consensus. Residential sales activity weaker in the most recent half as contracts on hand reduced to slightly under 6,000 against more than 7,000 at the previous update.

UBS analysts said that Stockland’s guidance was behind consensus and said that the last quarter’s residential net sales of was flat on the March quarter, but was helped by project launches.

They said investors were likely to focus on disappointing July sales inquiries of 289 and inquiries in the last quarter halving from elevated March quarter levels. “While the market will focus on short term sales we see longer term re-rate potential as the strategy transforms a more diversified business,” UBS said.