Listed residential developers report strong growth
Listed residential property developers have delivered solid results in the latest reporting season with improving housing markets and low interest rates benefiting the sector.
Peet Limited, AV Jennings, Finbar Group and Cedar Woods Properties last week reported substantial lifts in profit for the first half of the 2014 financial year.
Australand Property Group, Stockland Property Group and Villa World, which reported earlier in the month, also achieved higher profits and more residential sales for the first half of 2014, while Mirvac Group’s residential division had a record $1.5 billion in pre-sales at December 31.
“They’re all in a purple patch as it stands,” Morningstar head of property research Tony Sherlock told Property Observer. “They’re getting volume growth, getting price growth, and at the same time their carrying costs for land, with low interest rates, are low.”
Sherlock said he expected conditions to remain strong for the residential developers throughout 2014 and into 2015.
“What I’m most concerned about is those [developers] that are buying to add to their land banks now. I think prices have run a bit harder than they should and when interest rates have normalised the holding costs will go up and returns will go down,” Sherlock said.
The official cash rate is at a record low of 2.5%, while the Reserve Bank’s mortgage indicator rate for a standard variable home loan is 5.95%.
“When [interest rates] return to more normal settings – which from my perspective is 7 to 7.5% - the sector will struggle to hold the gains that have occurred in the last six to 12 months,” Sherlock said.
The residential developers are upbeat but cautious about the outlook for their businesses.
Peet, whose main developments are in Perth and Melbourne, reported statutory profit of $13.2 million for the first half, up from just $1 million in the previous corresponding period. The company’s managing director Brendan Gore said the group’s performance reflected a broadening market improvement after challenging conditions in the first half of FY13.
He said the foundations of the residential sector looked sound, although he expected market conditions to be mixed through FY14.
“Conditions across the Perth market are anticipated to remain robust with the price growth anticipated to moderate. Victorian sales volumes are expected to remain steady but price sensitive while activity in the Queensland market is improving,” Gore said in a statement to the Australian Securities Exchange.
“However, affordability, softening labour market conditions and consumer caution is likely to make for a subdued lift.”