Diversified property developer Stockland has sounded caution about the pace of the property market recovery, citing reduced access to credit as a key challenge for home buyers.
While tougher market conditions and lower valuations has hurt Stockland’s bottom line—the group reported a 69.6 per cent decline in net profit—Stockland’s residential division largely held up in line with expectations.
The group’s preferred barometer for measuring the health of its earnings, funds from operations, increased 4 per cent to $897 million.
Residential settlement defaults remained high at around 7 per cent, a significant increase on long term averages of 3 per cent.
Moody’s vice president Saranga Ranasinghe said the 7 per cent default rate was weaker than its expectation for Stockland, and highlights the challenging environment in the residential market.
Stockland said it has hit its revised settlement target, achieving 5,878 settlements and an operating profit of $362 million, up 8 per cent on the 2018 fiscal year.
The developer modified its residential settlements target from more than 6,000 settlements in June, blaming production delays, settlement issues and reduced credit availability.
Ninety-five per cent of Stockland’s residential portfolio is masterplanned lots, skewed towards rail-serviced corridors with high-population growth in Sydney, Melbourne and south-east Queensland.
Stockland Communities chief executive Andrew Whitson said the group expects to deliver a more muted 5,000 residential settlements in 2020, and is starting the year with 3,900 contracts on hand.
“Our strong pipeline of activated projects means we are well positioned to deliver supply to the market as demand improves, and we expect our default rate, which is currently around 7 per cent, to improve in the year ahead,” Whitson said.
Whitson said Stockland is re-stocking its residential landbank to take advantage of the current cycle.
The developer has snapped up two Melbourne sites, striking development agreements for a 210-townhouse project in Melbourne’s inner west and a 341-hectare land parcel in Melbourne’s north.
Meanwhile, Stockland has accelerated its retreat from retail.
The group’s retail town centre division returned a poor result for the listed developer, with retail town centre devaluations totalling $474 million for the year.
Group chief executive Mark Steinert said the 70 per cent fall in statutory net profit was caused by devaluations, a retirement living goodwill write-down, mark-to-market on financial instruments and a tax expense charge.
The group said it exceeded targets to offload retail assets, exchanging contracts for $505 million of retail assets including town centres in Bathurst, Cleveland and Caloundra.
Stockland said it will assess up to a further $500 million of non-core retail divestments over the next year.
The group’s over-exposure to retail town centres was pointed out by credit ratings agency Moody's, which said that Stockland was vulnerable to increasing online penetration and weak discretionary spending.
Steinert said that the group has been working to actively reposition its retail portfolio.
“Our retail town centre development pipeline has been reduced by around 50 per cent, with a focus on smaller placemaking projects which will redefine customer experience and convenience.
“Thirty-five per cent of the [retail] devaluations were driven by capitalisation rate expansion.
“About half were driven by the softening of growth rates, and changes to rental income and capital cost re-forecasting. The remainder were driven by increased land taxes and rates.”
