One of Australia’s major housing developers, Australand, has blamed poor affordability and the lack of any growth prospects for its decision to move further away from what used to be its key business, housing developments.
Speaking at the company’s AGM in Sydney last week, the about to retire CEO, Brendan Crotty revealed the switch, blaming the poor housing affordability in Sydney, Brisbane and Perth and the low prospect of this situation improving in the next five years.
In fact it was a gloomy summation of the outlook for housing in this country: a leading developer deciding to reduce its involvement, even as it freely admits that there could be a recovery in the market around the corner.
Other developers, such as AV Jennings, Mirvac, Stockland and Clarendon Homes (Investa) have expressed worries about the health of the NSW housing market and its prospects but none have been as direct at Australand.
AV Jennings said earlier this year that its performance in the current year has been severely impacted by the state of the housing market in Sydney and NSW.
Stockland moved away from its pure housing basis years ago and Mirvac has made a determined decision to diversify, buying assets from Lang Walker, including shopping centres and buying the Carlton Hotel interests.
All developers are seeking to offset or minimise their exposure to even these new areas by packaging up the investments and selling them to other investors but retaining the management rights and some equity
Sydney was singled out by Mr Crotty as was the unacknowledged major influence of the state Labor government which has been in power since 1995. In effect Australand was expressing no confidence in the ability of the Iemma Government to stimulate a lasting recovery in the Sydney housing market for the next few years.
“The outlook for residential property development still appears to be uncertain,” the AGM was told.
“While the fundamentals for the residential property sector in terms of rental vacancies and demand/supply equilibria continue to improve, market sentiment has not improved and affordability continues to be an issue in Brisbane, Sydney and Perth.”
“A recovery in the residential sector may only occur if and when interest rates start to trend downwards and affordability improves, though presently there is a slightly higher probability that interest rates may increase before they fall.
“A number of commentators have pointed out that the supply of new residential property has been running at approximately 90% of underlying demand in the 3 east coast capital cities for the last 3 years, which will manifest itself in significant levels of pent-up demand, when market sentiment recovers.
“However, affordability pressures and the low rate of growth in Sydney’s full-time work force suggest that a recovery in any of Sydney’s mainstream residential property market segments will not occur for a while.”
Australand is the rump of the old development business started by Les Hooker which became LJ Hooker and then Hooker Corporation.
It went close a couple of times to collapsing, was saved by the efforts of a former CEO, Keith Campbell (the man whose reported led the opening up of the Australian financial system) and the company later fell into the clutches of George Herscu, whose incompetent and crooked management took the company to the brink again.
The company was split up, the real estate agency business is now part of Suncorp Metway and Singaporean interests control the rump), now called Australand.
The stapled securities hardly budged in reaction to this significant switch in policy. They closed unchanged on Friday at $2.28 and then fell 2c yesterday to $2.26.
Australand intends moving deeper into commercial property in and around its residential developments or wherever it can find value and will include small, neighbourhood style shopping centres.
It will follow the company’s move into other areas of property in recent years, such as commercial and industrial developments, which has cut its dependence on the housing market.
Mr Crotty told shareholders:
“Australand intends to gradually reduce its exposure to the residential sector, in a measured way, during the next 3 years.
“While some may question this strategy because of the likelihood of a cyclical upturn in residential property during the next 2 years, it makes more sense for Australand to invest additional capital into sectors that will generate not only similar levels of development profits, but also additional investment property assets.
“Just as Australand has followed this course in the commercial and industrial sectors during the last 7 years, it now intends to broaden its approach by developing a series of neighbourhood scale shopping centres, not only on some of its large scale residential projects, but also on new sites acquired from third parties.”
It is anticipated that wholesale retail investment property trusts or joint venture entities may ultimately hold the projects that are developed via this strategy.
“The Group’s results for the March quarter are in line with previous years and reflect a lower proportionate contribution of residential development profits than what is expected to be brought to account in the remaining nine months of this year.
“The profits generated by the Commercial & Industrial and Property Trust businesses were slightly above the results that they achieved during the same period last year.
“Australand’s bright spot continues to be the rising profitability of its Commercial and Industrial division.
“Even if market conditions hold back this year’s residential profits, the ongoing growth of the Group’s commercial & industrial business combined with higher investment property income will allow Australand to maintain its profitability and continue to support annual distribut
