Deutsche downgrades Mirvac stock, cites impact from apartment market slowdown

Listed developer Mirvac’s stock has been downgraded by Deutsche Bank analysts, who say a likely slowdown in the apartment development market will hurt the company.

Mirvac’s stock has been downgraded to a "Hold”, with the investment bank's analysts saying they expect housing starts to slow in the next two years, The Australian Financial Review reported.

There could be a 20 per cent fall in new apartment project starts in the 2019 financial year.

Earlier this year , the $8.6 billion diversified developer had said the default rate among its apartment buyers remains below 2 percent.

Mirvac posted a 7 percent rise in profit for its first half ended December 31, capitalising on a record $3.1 billion of residential pre-sales.

Chief executive Susan Lloyd-Hurwitz had said the “moves by regulators and lenders will likely see price growth ease, however demand is expected to remain sound”. 

Deutsche analysts noted that the weakness in new apartment construction was due to banks raising interest rates for investors and and states levying higher stamp duties on foreign buyers.

"While we do not expect an increase to the official cash rate until December 2019, we note the banks are increasing rates to more risky 'interest only' customers," the analysts wrote.

The Deutsche downgrade was based on valuation, given that Mirvac's share price is now trading in line with its target price, the AFR reported.

They preferred Mirvac's exposure to the office sector – accounting for about 40 per cent of its fiscal 2017 operating profit – and its high-quality retail assets. 

Last month Mirvac launched its development of a $750 million-plus premium office tower at 477 Collins Street in Melbourne. 

"However, we have reduced our expectations for multi-family housing starts which represent around 50 per cent of the residential portfolio," the Deutsche note said.

Stamp duty increases for foreign buyers was expected to reduce their ownership count, they said.

However, the duty was "unlikely to have a long-lasting impact on house prices", they wrote, citing the Canadian experience where Vancouver house prices eventually rebounded 3 per cent after falling 7 per cent following the introduction of a 15 per cent foreign buyer duty.

Official figures last month showed a slowdown in new residential projects has already caused housing construction to fall at its fastest pace in more than 16 years, the AFR noted.

There was a 4.7 per cent decline in residential building for the first three months of the year, the biggest quarter-on-quarter decline since December 2000.