Stockland feels the pinch from rate rise, but sees construction cost pressures starting to ease

Stockland feels the pinch from rate rise, but sees construction cost pressures starting to ease

Property giant Stockland (ASX: SGP) is feeling the pinch from rising interest rates as inquiry rates for its residential communities have dipped to pre-pandemic levels.

However, according to the group’s Communities CEO Andrew Whitson, default rates by buyers have held steady and the current slowdown is expected to ease cost pressures on the construction sector over the next 12 months as development timeframes return to normal.

Stockland today announced a net profit of $301 million for the first half, down from $850 million in the previous corresponding period which was boosted by a $538 million lift in the value of investment properties.

The property group remains cautious for the year ahead, noting that market conditions remain uncertain.

Whitson says the latest half-year was impacted by weather delays in key markets, with property settlements from its communities skewed to the current half of the year.

“We are well positioned for this phase of the residential cycle, with 5,840 contracts on hand at an average price point 11 per cent above the 1H23 settlement average and a well-bought landbank that has strong embedded margins following several years of residential price growth,” he says.

Despite a fall in residential land prices of between 7 and 10 per cent since the peak of the market, Whitson says asking prices are holding up well.

“When we get affordable product into the market, we see a strong response from buyers," he says. 

He also sees improved conditions for builders as another positive sign, with fixed-price contracts on the rise.

“There is a lot more homebuilder activity offering fixed-priced packages which is a reflection of stabilisation in the homebuilder market,” says Whitson.

“The margins that are now being achieved are more sustainable.”

Stockland has reported that construction timeframes for land releases were still sitting at an average of 36 to 40 weeks.

“We haven’t seen that track back towards our longer-term average which is more like 26 weeks. That’s been predominantly due to weather which has disrupted particularly the early earthworks stages," Whitson says. 

Quarries have been unable to keep up with demand for products used in civil works, such as gravel, also due to weather disruptions, but Whitson is forecasting some relief ahead.

“We would expect those timeframes to come back towards 26 weeks over the next 12 months. As we see pipelines diminish that is going to put some downward pressure on pricing over that period," Whitson says. 

Although property prices have eased, he adds residential valuations from banks in the latest half-year have supported settlement contract prices.

“That’s really driven our default rate which sits around that long-term average of three per cent,” Whitson says.

“Overall, default volumes are pretty stable.”

Stockland’s Communities division delivered funds from operations of $113 million in the December half, which was 12 per cent below the previous corresponding period. The result was impacted by weaker contribution from its Masterplanned Communities division which is aiming for an improved performance in the current half.

Stockland’s group CEO Tarun Gupta says the lower contribution from communities was offset by a stronger result from the group’s commercial property investment portfolio.

“This reflects solid like-for-like net operating income growth and the contributions from Logistics developments completed over FY22 and 1H23,” he says.

Stockland has also announced an extension of its partnership with Mitsubishi Estate Asia through an agreement to invest in masterplanned communities. The capital partnership is expected to kick off in mid-2023 and will have a mandate to invest in “Stockland-owned and market-originated masterplanned communities”.

Gupta notes that conditions have broadly stabilised in the fallout from rising interest rates, without any serious warning signs.

“We are seeing in the residential land side there is no signs of particular distress although we are starting to see a little bit more product with more realistic expectations," Gupta says. 

“On commercial property, vendors are becoming more realistic and also in certain parts of the retail market where unlisted funds are looking for liquidity that’s where there are signs of movements.”

While there are “no particular signs of distress”, Gupta says if they find some “we are ready to pounce”.

Stockland is paying an interim dividend of 11.8c per share.

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