Property developer Stockland's profit plunges, but it's not because of falling house prices


August 21, 2019 12:49:51

Property developer Stockland has posted a 70 per cent slump in net profits, but it is not because of falling property prices along Australia’s east coast — at least not directly.

Key points:

  • Stockland’s “funds from operations” rose 4pc to $897m, but net profit slumped 69.6pc to $311m
  • A $474m write-down in the value of its shopping centres was the key cause of the profit slump
  • Stockland is trying to move its remaining shopping centres towards less discretionary retail and more services, food and entertainment

The company’s slide in net profit to $311 million was not caused by a downturn in residential sales — far from it, the company settled on 5,900 new homes and apartments, with operating profit from that division up 8 per cent and market share growing to 15 per cent.

In fact, Stockland’s managing director Mark Steinert said the company was restocking its “residential landbank” — currently 76,000 lots, with more than 60 per cent in Sydney and Melbourne — to position itself for the future.

“We are clear that the housing market has bottomed, but we are cautious about the pace of recovery,” he said.

“We are well positioned to benefit from an improving market, however we expect conditions to take some time to normalise as customers continue to experience challenges achieving loan approvals.”

Stockland specialises in building master-planned townhouse communities near rail corridors, and is focused precisely on the areas of south-east Australia — Sydney, Melbourne and south-east Queensland — that have experienced price declines recently after a boom in Sydney and Melbourne over the previous couple of years.

The company’s head of residential, Andrew Whitson, said despite the broader downturn, it had achieved an increased average price for lots settled in Sydney and Melbourne, and inquiries had increased by 50 per cent in those cities since the federal election in May.

Although he also noted the default rate on contracts was 7 per cent — more than double the usual level, which the company blames on tougher lending restrictions, and a number Stockland is expecting to improve over the year ahead as access to credit becomes easier due to regulatory changes.

Nor is the company’s profit dive related to its workplace and logistics division — an area where the company is expanding with the hope of making it 25 to 35 per cent of total assets, versus the current 23 per cent.

Part of the decline is due to its retirement living division, with devaluations for some properties and a write-down in “goodwill” — the accounting term for the value of a business’s brand, reputation and other “intangible” assets.

Stockland accelerates retail retreat as sector struggles

But it was in shopping centres where Stockland really burnt cash over the past year — a whopping $474 million of devaluations, explaining the bulk of the company’s profit slide.

Mr Steinert said about half of the devaluations were softening growth rates, changes to rental income and estimated capital costs to keep the shopping centres spick and span.

He also spoke of the company’s strategy to “remix tenancies” — away from struggling retail and towards consumer services and experiences — and to “renew some leases at more sustainable levels”.

This speaks to the immense pressure that many retailers have been under as consumer spending dries up, with some of the big players threatening to pull up stumps out of shopping centres if their demands for lower rents are not met.

This is where the indirect effect of falling house prices is hitting Stockland, even as the direct effect has not been acutely felt — it is known by economists as “the wealth effect”.

As the economic theory goes, when the value of our assets is rising, we feel richer and able to effectively draw down on some of that paper increase in wealth to supplement our income and spend more than we are earning.

Unfortunately for Stockland, and the broader Australian economy, the same effect works in reverse — as our asset values fall, we feel poorer and tend to spend less and save more.

Given that our homes are the biggest asset for the majority of Australians who own the one they live in, the recent double-digit decline in average housing values has the nation collectively feeling poorer, less secure and spending less.

Retail has been on the receiving end of this — along with massive structural change from online shopping and international rivals — with many widely-watched indicators showing that sector is in, or at least near, recessionary conditions.

After several years of weakness, that retail recession is now feeding up to the landlords that rent out shop spaces, with some tenants going out of business and others demanding rent reductions in order to stay afloat.

Stockland reported essentially flat earnings coming from that division, with the value write-downs sending it deep into the red.

Retail remix to services and logistics

As this sector weakens, Stockland is seeking to reduce its exposure, having sold off more than half a billion dollars’ worth of retail space, although it is still targeting a 40 to 45 per cent share of retail in its property portfolio.

The company’s head of commercial property, Louise Mason, explained the remix in tenants, which was designed to keep Stockland’s shopping centres relevant and visited by consumers.

“Our centres are focused on middle Australia, and have a strong emphasis on medical, health and wellbeing, government and non-government services, technology, fast casual dining, fresh food, household products and family entertainment,” she noted in the profit results.

“Non-discretionary spend comprises around 70 per cent of our total sales, which provides some protection from the challenging retail environment.”

Somewhat ironically, the online retail growth that is accelerating the decline of many of Stockland’s shopping centre tenants is assisting the expansion of its workplace and logistics division.

“The logistics market continues to be supported by ongoing investment in infrastructure, export growth and growth in online retail, which is driving occupancy and rental growth,” Ms Mason said.

Investors were not impressed with the picture overall, pushing the stock down almost 5 per cent by 10:50am (AEST) to $4.37.








First posted

August 21, 2019 11:41:10

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