Improving credit conditions and government incentives are driving buyer confidence, according to residential developer Stockland.
The developer blamed production delays at Mt Atkinson, a large housing estate in Melbourne's west, for the shortfall, with settlements deferred to the 2020 financial year.
Stockland, which makes about one-third of its profit from residential development, said it was on track to settle over 5,000 new homes in the current year and that a rebound in the market would push settlement volumes higher in the year starting next June.
Despite the drag on sales and settlements, Stockland has maintained profit from its residential book in line with expectations, due to a favourable skew in settlements towards higher margin projects.
Stockland reaffirmed its outlook for the period, noting that while current market conditions remain mixed, fundamentals are positive with steady employment growth, record low interest rates, recent tax cuts and high investment in infrastructure.
Stockland chief executive Mark Steinert said the residential business had its strongest quarterly result this calendar year with a profit skew of around 65 per cent to come in the second half this year.
“The residential market cycle has improved, particularly in Sydney and Melbourne, and the south-east Queensland market is steadily improving.”
The company said that revenue in the next financial year was expected to benefit from the residential market recovery and five new communities opening driving increased lot settlement volumes above the mid-point of its through the cycle range.
“The Sydney market was particularly strong in September,” Steinert said.
“However our overall default rate remains elevated due to a portion of contracts extended from the fourth quarter of fiscal 2019 not settling, and the settlement volume for the quarter being seasonally lower.”
“The number of defaults is moderating and the default rate is expected to reduce over the balance of the financial year.
“Around 80 per cent of our residential customers are owner-occupiers, and the current low interest rate environment, improving credit conditions and government incentives are driving buyer confidence.”
Stockland has a diverse portfolio, with exposure to commercial property sectors—office, retail and industrial—as well as its residential projects.
Stockland’s retail town centre portfolio achieved comparable MAT growth of 2.6 per cent for the quarter, including 3.5 per cent growth in majors, driven by the strength in supermarket sales.
“Over the coming months we will finalise the remaining settlements from $505 million of exchanged non-core retail divestments, and will continue to focus on improving future income resilience by ensuring rents are sustainable; through repositioning and placemaking initiatives; and remixing tenancies to reflect consumer trends around convenience and experience,” Steinert said.
Across its office portfolio Stockland recorded an occupancy of 99 per cent for its Sydney assets, with a weighted average lease expiry at 3.8 years.
The company's development pipeline now totals over $2.5 billion, and includes development opportunities within its existing portfolio at Melbourne Business Park in Truganina in Melbourne, North Sydney, Macquarie Park and the Sydney CBD.
It is pursuing a strategy of increasing its resources in its office and logistics portfolio, highlighting a number of acquisition and development opportunities, singling out a 50 per cent stake in Sydney's Piccadilly Complex in August.
“Following the acquisition of the remaining 50 per cent of Piccadilly Centre, putting us in a good position to progress our development plans, we also recently reached a heads of agreement with our long-term tenant Optus for the renewal of their lease at Macquarie Park in Sydney.”
“Our logistics portfolio has almost doubled in size since December 2013, and continues to perform strongly as we up-weight our exposure to this asset class through development and strategic acquisitions.”
Over the medium term, Stockland expects to increase the weighting of its capital allocation to office and logistics assets up from 21 per cent to between 25 per cent to 35 per cent.
Stockland shares rose 17 cents, or 3.7 per cent, to $4.79 after the market update.