Sydney house prices could be approaching their peak, one of the country’s biggest residential developers has warned.
Mirvac Group yesterday revealed it had hit a record $2 billion in home and apartment pre-sales.
The $6.7bn commercial property owner and residential developer has turned its attention to a near $450 million play for Investa Property Group’s $8.9bn office funds management business as the prospect of slowing volumes emerges.
“It does seem the Sydney market is close to the point at which that strong upward trajectory will end,” Mirvac chief executive Susan Lloyd-Hurwitz said.
“Previous cycles would suggest that activity and the volume of sales should moderate over the next year or two by 15 per cent.”
The comments from the developer came as it revealed full-year results including a 36 per cent jump in net profit to $609.9m, fuelled by 2271 residential lot settlements.
Mirvac has repositioned its residential arm to target surging demand for apartments in inner city areas of Sydney and Melbourne, with projects in Glebe and Melbourne’s Docklands under way.
But market conditions could be turning, and the prospect of macroprudential measures hitting at a time buyers are less willing to buy could have unintended consequences.
“We think (the market is) close to an inflection point where we’ll start to see growth really moderate from its high double-digit numbers,” Ms Lloyd-Hurwitz said.
“And implementing tough macroprudential measures when the market could already be regulating ... it’s something we need to watch.”
The chief executive noted that higher rental vacancies and lower clearance rates were early warning signs the home market could be headed for a slowdown, with recent Westpac surveys that gauge willingness to buy also trending down.
Strong housing pre-sales have already enabled the group to lock in 67 per cent of development earnings for fiscal 2016 and 57 per cent for 2017, with the group expecting another 2800 settlements during the current financial year.
The company’s main focus is staying well-capitalised with gearing between 20 and 30 per cent, and keeping a tight rein on costs, after a recent strategic review.
“We are extremely well positioned to deliver earnings growth in (fiscal 2016), and we continue to focus on maintaining strong metrics in our office, retail and industrial portfolios,” Ms Lloyd-Hurwitz said.
Operating profit grew at a steadier pace of 4 per cent to $454.8m, representing earnings of 12.3c per share, which was at the top end of guidance.
The company said occupancy in its industrial portfolio was almost 97 per cent, with an average lease expiry of 4.5 years. It had also sold five office assets for $248m, which brought total disposals for the year to $406.7m.
Ms Lloyd-Hurwitz confirmed Mirvac is in exclusive due diligence with Morgan Stanley Real Estate Investing to acquire the Investa Office Management platform, as it seeks to grow its funds management business.
Confidentiality agreements prevented the group from discussing the value and composition of the deal, but it confirmed an agreement would include co-investments in the unlisted Investa Commercial Property Fund, the CIC-controlled Investa Property Trust and the listed Investa Office Fund. Mirvac wants to grow its funds management arm in a bid to expand its development pipeline without stretching its balance sheet.
“It would be very strategic for us to have more of a wholesale capability within the business,” Ms Lloyd-Hurwitz told The Australian.
“It’s very important for a business like Mirvac to have strong and deep access to third-party capital as an additional way of being able to grow the business.
“We have a firm split between passive and active investments — 80 per cent is passive and 20 per cent is active — and we could probably do more active development if we weren’t constrained with how we can position our capital.” The group has given no guidance on how it will fund the transaction and offered no comment on speculation it would embark on an equity-raising to source the funds.
Ms Lloyd-Hurwitz has given early indications that the funds are likely to come from outside the business and assets sales are an option.
“We’ve very disciplined about how we source and use capital, and we look for ways we can self-fund all the time so we don’t have to go back to the equity markets,” she said. “We’re very committed to our gearing range of 20 to 30 per cent.”
“It's a good result,” UBS analysts said, noting strong pre-sales in the residential division, reasonable results from the property trust and the fact that the development division had made progress on leasing.
CLSA analyst Sholto Maconochie agreed. “It’s a strong result in terms of pre-sales — $2bn is huge — but they’ve also shown strong margins, and a good return on capital. The metrics are looking good.”
The share price closed flat on Thursday at $1.83, with analysts speculating that a cautious outlook for residential markets might have rattled some investors.
“Maybe people are still cautious about residential, or maybe people think there should be higher growth, considering the conditions,” Mr Maconochie said.
This article first appeared in The Australian Business Review.