Stockland expects further slide in profits in 2012-13 in ‘very tough’ Victorian residential market

Stockland shareholders have been warned that profits will fall further in the next financial year with the Victorian residential market the standout weak spot.

Delivering his final address as managing director before he steps down in February, Matthew Quinn provided an update on residential deposits taken over the first quarter of the 2013 financial year.

Over the three months to September, net deposits taken declined from 1,127 to 1,082, with deposits on Victorian residential developments declining from 289 in the final quarter of the 2012 financial year to just 161 in the first quarter of the 2012-2013 financial year.

A smaller decline in deposits was recorded in NSW (170 to 142), with an improvement noted for Queensland (deposits up from 334 to 386) and Western Australia (334 to 393).

“Our residential business faces a high degree of uncertainty given current buyer caution,” Quinn told shareholders in Sydney today.

“There have been some signs of improvement in the housing market, particularly in Perth and we have recently been bolstered by first-home buyer stimulus targeted at the new housing market in Queensland and NSW.

“The reality, though, is that conditions are very tough in Victoria where the company’s most profitable projects are located.”

Stockland has eight residential community projects on the Melbourne fringes, including Highlands in Craigieburn and Selandra Rise in Clyde North.

Quinn reminded shareholders that at Stockland’s full-year results presentation in August, he said Australia was experiencing “the worst new housing market I had seen in more than 20 years in the industry”.

“This is not only because sales are at a cyclical low, but because this has persisted despite conditions that would normally stimulate activity – low unemployment, low interest rates, undersupply of housing and low rental vacancy rate.”

Quinn says that in every state where Stockland operates housing approvals are tracking well below the long-term average, and nationally the market is 18% below historical averages.

“Housing approvals is a lag indicator and these figures don’t yet reflect the recent downturn in Victoria which we expect to show through sharply in coming months.

“The good news is that population growth remains strong and this cycle will turn, but the question is ‘when’.

“We need to see a trigger for improvement – a sense that the market is moving, so cautious consumers become more concerned about acting too late than acting too soon.

“Interest rates are normally a driver of this, but in this cycle home owners are just paying off their mortgages more quickly rather than taking on more debt. In the long term this is a good thing, but it’s painful while we go through this process.”

Quinn also reminded shareholders that while there is always a big focus on Stockland’s residential business, the majority of its assets are “investment properties where the profits are very predictable from secure, rental backed contracts”.

He said Stockland’s $5 billion shopping centre portfolio continued to perform well in the challenging environment and is expected to achieve 2% to 3% comparable net income growth in the 2013 financial year.

However, overall profit from Stockland's commercial property investments will be lower than last year. 

In addition, while Stockland’s retirement living business continues to see strong demand for products, "settlements are being impacted by the soft residential market conditions, particularly in Victoria".

In his address to shareholders, Stockland chairman Graham Bradley said a “combination of factors including low consumer and business confidence, anxiety about global economic conditions and fear of unemployment” have combined to produce headwinds, which have impacted on Stockland’s profit performance in the 2011-12 financial year. He said these headwinds “will continue to do so in the current 2013 financial year when, I regret to report, we expect our profit to decline further”.

Stockland profits fell 7% to $676 million in the 2012 financial year, with profit from its residential business falling 15%.

Bradley said the Stockland board is confident of delivering improved returns from the 2014 financial year, “as our three major retail developments come on line and as we launch new residential projects”.

He also thanked Quinn and said Stockland had grown significantly under Quinn’s leadership, who also steered the company through the 2008 financial crisis.

Bradley said the search for Stockland’s next managing director was progressing well.

“We look forward to announcing the appointment of our new managing director in due course.

“In terms of day to day operations, we are pleased to have a strong management team in place who will ensure that our business maintains momentum and achieves a smooth leadership transition.”