Residential recovery underway but more pain for Stockland as $49 million write-down revealed

The residential property market recovery is underway but the house and land market is lagging this by around six months, new Stockland CEO Mark Steinert has told investors at a third quarter update.

He also revealed more pain ahead for Stockland investors before a recovery from about 2016 onwards with another $49 million worth of write-downs identified on previously impaired projects.

This follows Stockland reporting a $306 million write-down across 13 residential community projects in February as part of a 148% drop in statutory interim profits and a loss of $147 million to December 31.

The new writedowns assume a worst-case scenario with "no additional material impairments"expected "unless trading conditions deteriorate significantly".

Third quarter performance is expected to be in-line with expectations but earnings per share for the full 2013 financial year will be down 25% on 2012 and at the bottom end of the target range provided three months ago.

Stockland is forecasting a 2013 distribution to shareholder of 24 cents per security.

Steinert revealed that only 30% of Stockland’s projects are “capital efficient” amid an overall upbeat outlook for the residential market.

“Key leading indicators are showing signs of improvement and the established housing market is improving,” said Steinert.

Stockland achieved its strongest net deposits in the March third quarter of 2013 since the first quarter of 2011, with its WA division accounting for 47% of these and Victoria improving, though still impacted by "competitor rebating".

"Queensland lead indicators suggest confidence is returning, but this varies between sub-markets," he said.

Steinert said the group would no longer build standalone high-rise apartments, saying this had been an “unhappy” experience for Stockland and also “high risk”.

Instead, Stockland will look to “reshape” the residential portfolio by accelerating the launch of new projects that “improve geographic diversity, accelerate completion of poor performing projects and right-size the land bank”.

Stockland will also look to expand its customer reach with medium-density offerings, noting the success of its terrace home Bower series at its Bells Reach community in Queensland.

Other successful medium-density projects noted by Stockland include the Mernda (Victoria) and Willows (NSW) retirement projects, Essence in Maribyrnong and Riverwalk and Waterside in NSW.

In the growing medium-density housing market, Stockland will look to build semi-detached and attached houses, townhouses, and terraces as well as low rise apartment towers of up to six levels.

These will be built by “selectively developing land from its existing land bank”.

“Residential performance will improve in coming years with the launch of new projects, disposal of non-core assets, reduction in cost base and delivering community outcomes in our larger masterplanned communities,” said Steinert.

stockland_housing_graph

 


Stockland has an existing land bank of 86,000 lots of which 31,000 of these lots are at its $4 billion Lockerbie project in Melbourne’s north (covering 1,121 hectares and aimed to deliver homes for 30,000 people) and its 2,300-hectare Caloundra South project on the Sunshine Coast, with plans for homes for 50,000 people.

stockland_land_bank

Source: Stockland

The goal will be to reduce its land bank to 51,000 lots by 2018 with 30,000 of these remaining lots in Lockerbie and Caloundra and 21,000 in other projects.

The group is targeting 5,000 to 6,000 lot sales per annum with an expectation of rising sales in NSW (17% to 21% of sales), Queensland (30% to 33%) and WA (19% to 23%).

However, lots sales in Victoria are expected to fall from 34% to 23%.

Stockland will launch new residential projects in East Leppington and Marsden Park in NSW in 2014/15 to “take advantage of the strong market conditions in metropolitan Sydney”.

It also notes that its WA business is “now at scale and benefiting from the strong market conditions”.

In total Stockland has 28 active residential projects covering 28,000 lots with plans for five new projects valued at $200 million to be launched in 2014/15 covering 11,000 lots.

Stockland expects residential margins to increase from 2016 onwards and will look to increase revenue by “creating a better community value proposition that drives higher customer referrals”.

Around a fifth of all new sales leads are referred.

“These leads convert at three times the rate of a non-referred lead. There is a strong link between satisfaction and referral,” says Steinert.

“Our proprietary liveability study of over 1,700 residents has enabled the identification of the specific community elements that contribute the most to higher customer satisfaction (or liveability)

“By focusing our development and community creation activities on the most important elements, we can increase satisfaction, drive greater referral rates and grow margins over time,” says Steinert.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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