'Conditions are challenging': Housing slump, weak retail hit Stockland

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'Conditions are challenging': Housing slump, weak retail hit Stockland

By Simon Johanson

Stockland has warned Australia’s housing crunch and weak retail conditions will limit growth in its full-year earnings as it faces "challenging" markets for the rest of the year.

The country's largest diversified property developer kept its guidance at the bottom of its target range after funds from operations - a key measure of its profit performance - fell 6.7 per cent for the half-year.

The property slump in Sydney and Melbourne is hitting Australia's largest property developer.

The property slump in Sydney and Melbourne is hitting Australia's largest property developer. Credit: Rob Homer

Funds from operations (FFO), which real estate investment trusts use to determine cash flow, were down 6.7 per cent for the half-year to December 31, coming in at $407 million, the company reported on Wednesday.

“Weak housing markets and ongoing headwinds in the retail sector will likely see our full year results at the lower end of our guidance range for FFO per security growth of 5 to 7 per cent,” chief executive Mark Steinert said. "Conditions are challenging."

Half-year profit halved to $300 million from $684 million and revenue was down to $1.1 billion from $1.3 billion a year earlier, a change attributed to losses on financial instruments, downward revaluations in commercial property, fair value changes in retirement living assets and a tax expense.

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Tougher retail conditions prompted Stockland to boost its planned sale of non-core smaller shopping centres, putting another $200 million of centres up for sale on top of the $400 million it first proposed offloading in June. It has already sold assets worth up to $113 million.

Retail funds from operations rose 4.3 per cent to $218 million, but on a like-for-like basis they were down 1.1 per cent. More positively, foot traffic was up 4 per cent and a focus on "remixing" retail tenants grew the key segment of speciality sales by 4.8 per cent.

"We don’t expect a big improvement in consumer sentiment, but people are still spending, they’re just spending at a more moderate rate,” Mr Steinert said.

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Incentives to tenants in Stockland's town centres rose to 14.5 per cent over the lease-term life and rental growth stalled to just 0.2 per cent.

Funds from operations in Stockland's commercial property division were up 3.8 per cent to $314 million off the back of strong workplace and logistics markets.

The housing slump was also impacting settlements in Stockland's established retirement living villages, which fell 10.3 per cent. The group has begun to sell non-core villages.

The half-year result came below market expectations, with Macquarie analysts labelling it a “skewy one” and keeping the company on a “neutral” rating.

“A softer FY19 outlook than anticipated, as well as negative comparable FFO growth in retail and limited residential net deposits are headwinds for the stock,” Stuart McLean said.

Outpricing competitors

A large skew in home buyer settlements to the second half of the year saw operating profit in the residential division fall 21.8 per cent to $142 million.

Mr Steinert said the residential business was in a “good position” for the second half of the financial year, where it had 5900 contracts on hand, including about 3600 that were due to settle.

The diversified developer makes about a third of its profit from residential sales.

“We expect further price declines in residential land of around 5 per cent over this calendar year, concentrated in Sydney and Melbourne.”

But Stockland was well placed to weather the downturn because it could offer house and land packages 20 per cent cheaper than surrounding prices, Mr Steinert said.

"Even in a weaker market our product [...] can gain market share and outsell. We’re the largest developer in the country and we’ve got 15.6 per cent of the land market."

Stockland said it remained on track to deliver FFO per security of around 5 per cent, at the lower end of its forecast 5 to 7 cent guidance, reflecting the weaker market conditions.

Investors will be paid a dividend of 13.5c on February 28. Shares in the $9 billion company closed marginally down at $3.68.

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