Home affordability ‘increasingly concerning’, top developers say

Stockland and Mirvac, the country’s two biggest residential developers, will focus on providing more affordable housing through mixed-use urban redevelopments.

Releasing their third-quarter trading updates, the two development giants said that affordable housing was “becoming an increasingly concerning issue”, particularly in Sydney, which needed to be addressed.

Stockland is a housing developer, while Mirvac is more focussed on apartments. Both groups are now moving more into mixed-use projects, combining residential property with schools and retail space.

They said that prices in Sydney and Melbourne had increased significantly, following a strong spring and summer selling season. Recent moves by financial regulators and lenders may see price growth ease, however demand is expected to remain sound.

The n Prudential Regulation Authority (APR) and the n Securities and Investment Commission (ASIC) have taken steps to curb residential price growth by enforcing stricter regulations on lenders.

Recent declines in approval and building commencement rates suggest developer finance is tightening, and construction should peak this year.

Brokers at Moelis & Co predict housing demand and supply will return to equilibrium by 2019, “assuming continued population growth and slowing rates of construction”.

“Sydney and Melbourne dwelling prices have likely peaked, however we don’t expect any major correction,assuming no significant changes to the outlook for the macro drivers, albeit downside risk to apartment prices in certain sub-markets is possible,” Moelis & Co analysts said.

The brokerage said lending restrictions may advantage well-funded developers with strong balance sheets such as Mirvac and Stockland at the expense of private operators.

“Demand remains strong, but will be tested as affordability deteriorates, supply comes onstream and macroprudential moves raise the cost and reduce the supply of lending,”‘ Moelis & Co said. On track to meet targets

Stockland’s chief executive Mark Steinert said its residential business is benefiting from “well-located projects in high growth corridors, our more diverse and affordable product mix, strong market conditions on the East Coast, and the stabilisation of the Perth market”.

“We remain focused on providing affordable housing solutions for our customers with first home buyers making up 54 per cent of purchasers for the quarter and 77 per cent of our residential properties sold to owner occupiers,” Mr Steinert said.

Stockland’s residential business achieved 1,891 net deposits in the quarter and 5,984 net deposits in the financial year to date, compared to a total of 4,844 net deposits at this time last year.

Mr Steinert said Stockland’s residential business was on track to meet its full-year target of more than 6,000 settlements.

Overall, Stockland is heading for funds from operations (FFO) per security growth of 6 per cent to 7 per cent in the 2017 financial year with distributions targeted at 25.5?? a share, assuming no material change in market conditions

Peter Zuk from Shaw & Partners said Stockland’s focus on residential “seems to be on track”.

“Clearly, a focus going forward will be on the investor sales in light of tighter lending standards by the banks and the state of house prices in general,” Mr Zuk said. Homing in on first-home buyers

Mirvac’s chief executive Susan Lloyd-Hurwitz said the group’s residential defaults remained below two per cent.

With housing affordability “becoming an increasingly concerning issue in Sydney,” she said Mirvac has started an initiative to assist first-time home buyers, giving more than 50 market entrants the chance to purchase property at the company’s Sydney Olympic Park development.

“We will continue to look at how we can address housing affordability in Sydney,” she said.

Within Mirvac’s residential business, there has been “a solid amount of sales activity, up 18 per cent on the prior corresponding period, and we remain on track to achieve a full-year return on invested capital of more than 15 per cent”, Ms Lloyd-Hurwitz said.

“We also expect to settle about 3,300 residential lots in the current financial year.

Analysing the result, Macquarie Equities analysts noted that “residential pre-sales of $3 billion, compared to December 2016 of $3.1 billion, remain elevated despite recent settlements with sales activity said to be up 18 per cent on the previous corresponding period”.

“This will provide enhanced confidence in 2018 residential earnings,” the broker said.

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