Developers to feel pinch as home values sink further
PROPERTY developers with an exposure to the residential sector are in for a bumpy ride in coming months, with Morgan Stanley analysts predicting a drop in home values of between 5 and 10 per cent.
PROPERTY developers with an exposure to the residential sector are in for a bumpy ride in coming months, with Morgan Stanley analysts predicting a drop in home values of between 5 and 10 per cent.Stockland and Mirvac have the biggest exposure to the home market but their earnings will be protected from big falls by the strong office market.In a report to clients on Friday, Morgan Stanley said it expected the continued negative pressure on the Australian housing sector means a re-rate is unlikely in the short term."We cut earnings for Stockland and Mirvac and downgraded Mirvac to underweight. Stockland is our preferred pick of the residential names," the report says."We expect house prices will decline 5 per cent in 2011 and will be negative to flat in 2012: this assumption is on the basis that prices stabilise later in 2012."We believe developers may fare slightly better in price growth through varying product and project mix," the report says."Despite this, our bear case suggests downside risks to house prices exist, with potential nominal price falls in 2011 of about 10 per cent and a further 10 per cent in 2012."Mirvac was already hit when it was forced to write down its Tennyson Reach development in Brisbane by $80.8 million to a nil value due to the impact of January's floods in Queensland."While the balance sheet impact is relatively minor, when combined with ongoing capital expenditure commitments Mirvac's acquisition/buyback capacity is diminishing in the absence of further asset sales," a real estate analyst at Deutsche Bank, Matthew Bertram, said.Further weighing down property developers is the news that the country's high-rise residential construction market is also showing few signs of recovery.The latest Leading Indicators report by the research and advisory group Davis Langdon says there was an 18 per cent decrease in the commencement of new high-rise developments in the last quarter of 2010.