Stockland downgrades earnings as wet weather delays Illawarra residential projects

The highest rainfall in the Illawarra region in NSW in 50 years, which has delayed activities at two residential projects, has contributed to Stockland issuing an earnings downgrade for the 2012 financial year.

The two projects are Brooks Reach in Dapto, comprising 618 lots, and McCauley's Beach in Thirroul, comprising about 160 lots.

The developer has cut its full-year earnings guidance from 31.6¢ earnings per share to 30.2¢ per share, a drop of 3.5%.

The decline is 50% attributed to weaker sales, 35% attributed to delays in settlements in the Illawarra projects due to rain and the balance due to lower-than-expected sales of superlots (larger lots sold off for other uses, such as lots sold to a government for a school or sold to another developer, which may choose to develop apartments).

Stockland’s announcement has prompted analysts' outlook for the residential market to weaken.

“[The downgrade] will erode any underlying hope that the residential consumer will become more active near term”, says Simon Wheatley, senior REIT analyst at Goldman Sachs, following the announcement.

Stockland shares fell 13¢, or 4.1%, following the announcement to $3.01 in early trading, making Stockland the second-worst performer among the top 200.

Stockland CEO Matthew Quinn says the wet weather in the Illawarra – the wettest in 50 years –resulted in production delays and settlement delays in the two projects.

Lots in McCauley's Beach are for sale for between $400,000 and $700,000, and those in Brooks Reach (pictured below) are for sale for between $159,000 and $250,000.

“We thought we had factored in weather … but it’s something we will have to factor into future forecasting,” Quinn said in an analysts’ briefing following the downgrade announcement.

“We had pre-sales in place, but these will now only settle in 2013 financial year,” he says.

Furthermore, Quinn says residential lot sales are being affected by competitors cutting their prices of lots sales by between $50,000 and $70,000.

In November, Stockland heralded the sale of 40 Brooks Reach lots in just 29 seconds in an online sale, with lots ranging in size from 550 square metres to 700 square metres and priced around the low- to mid-$200,000 range. They were sold online to avoid potential buyers camping out to secure a lot and were part of a batch of 70 sold in the first week after the project’s launch.

A spokesperson for Stockland says settlement of some of these online sales might have been delayed as consequence of the weather.

Quinn says the downward shift in market sentiment followed interest rate increases by the banks as well as other localised factors such as a “marked shift” in Queensland sentiment ahead of the recent election.

“Queensland demand has been quite soft due to people being frustrated… Queensland needs an injection of activity,” he says. 

Quinn says sales were strong in January and February but there had been a degree of softness in March sales, “ based on wet weather and softness to continue for rest of financial year”.

"National dwelling approvals are running well below historical trend, and we expect the residential market to find a floor in the next six to 12 months," he said in an earlier statement.

Quinn also highlights the market’s sensitivity to interest rates.

“Unfortunately the residential market has deteriorated since banks lifted interest rates independent of the RBA, and March sales have been lower than expected. The revised guidance assumes sales will continue to be slow for the balance of the financial year,” he says.

“If the RBA were to cut rates and the banks passed this on it would spur people on and give a kicker to confidence.

“But realistically when it comes through it is unlikely increase sales for this financial year, but only impact on next financial year,” says Quinn.