Investment sentiment toward some of Australia’s largest developers is waning, with falling property prices putting pressure on settlements.
UBS market analysts have maintained their “sell” recommendation for Mirvac, putting the developer ahead of Stockland and Lendlease in terms of exposure to settlement risk.
Apartment prices are 7 per cent down from their peak in Sydney and 2 per cent in Melbourne, with further falls expected.
Investors comprise a large chunk of Mirvac’s apartment buyers, and with sales trending down, particularly in NSW, the company’s earnings are sensitive to the slump.
“[Mirvac’s] most at risk projects are in Sydney (Marrickville and Sydney Olympic Park), which appear already out of the money with the Sydney apartment price index down 5 per cent since launch,” UBS analysts Grant McCasker and James Druce said.
UBS’ bearish stance on Mirvac is due in part to the launch dates of its projects stretching out beyond 2020, with a third of the group earning’s scheduled to come from apartment sales that year.
This is contrasted with Lendlease’s apartment pipeline, which is scheduled to dry up entirely in 2020-21.
“We are less concerned about Lendlease’s settlement risk given the price growth since the 2015-16 launch dates,” the analysts wrote.
A spokesperson for Mirvac said it was in “blackout” prior to the release of its results next Thursday, but its head of residential Stuart Penklis said that the company was monitoring the changing markets.
“It is important to remember that ‘average’ price changes mask significant differentiation between submarkets and housing type,” he said.
“We believe that our disciplined approach to restocking, our commitment to design excellence, a quality product and customer care will continue to differentiate us from others in the market.”
UBS noted that recent data suggested that cancellations were increasing.
“Cancellation rates continue to run at very low levels to date however, tightening credit, price declines, increased levels of incentives, lower deposits and a large amount of nomination contracts advertised on trading sites suggest this will rise.
“We expect Stockland’s [2019] second half settlements to disappoint as cancellation rates increase and settlement times extend.”
Hero image: Artist rendering of Pavilions by Mirvac.
