Stockland's managing director Matthew Quinn tells Business Spectator's Alan Kohler, Robert Gottliebsen & Stephen Bartholomeusz:
- There likely won’t be a major correction in the property market because of the supply and demand equation in Australia
- Stockland is re-weighting its portfolio toward retail, but specifically solid regional areas and non-discretionary or value-end stores
- Trend towards smaller housing lots means it will be necessary to sell higher volumes in order to maintain profitability, although margins will remain the same
- Stockland is well placed to weather any further European flare-up, with no major refinancing imminent and low exposure to bank loans
- Is bearish on office space and will sell off its office and industrial portfolio within five to seven years
Alan Kohler: Now Matthew, to what extent is demand for your products, that is to say the housing that you’re selling, in the hands of the banks? In particular I’m thinking about loan-to-value ratios which have come down at the peak of the boom. LVRs were up to 105 per cent, where they were lending the conveyancing cost, which obviously helped your volumes. They’re now down quite significantly. To what extent has that harmed your business?
Matthew Quinn: Well, in the long term it’s actually a good thing because the last thing we want to see is people coming into home ownership who shouldn’t be there. And the loans that were, as you referred to, 105 per cent were few and far between and they tended to be the low-doc, no-doc, non-core bank lenders. Now that we’ve gone back to the Big Four with the prime market share we’ve got very responsible lending. Typically for a first home buyer, they can still lend 90 per cent, in some cases 95, but only if they’re a really secure, good income and good savings prospect. So I think it’s fair to say that whoever gets a loan deserves to get a loan and credit is still there for those people who deserve it.
AK: I guess the implication of what you say is that you’ve got some customers in your homes who shouldn’t be there.
MQ: No because when we sell we actually put all of our customers through our own finance checks and we wouldn’t sell homes to people who shouldn’t be there. It would be quite irresponsible to do that and we actually have a very stringent process that we go through to make sure that that doesn’t happen. It’s actually counterproductive to us to do that because ultimately if we do, then those homes potentially get into distress, a resale and that hurts the brand product that we have as well. The article you wrote yesterday I read with interest about debt and debt is one of the biggest issues that we face. I’ve got to make sure that our customers have as affordable housing as possible and not too much debt.
AK: That piece was in Business Spectator in fact (Debt's pall over the Lucky Country, February 15).
MQ: It was indeed.
Stephen Bartholomeusz: You’ve changed the residential land strategy shifting it towards smaller lot sizes. Can you explain why you’ve done that and what effect it has had?
MQ: I think, Alan, you hit the nail on the head yesterday because the key issue that’s been facing this country. In my view, one of the biggest issues for the last 10 years is housing affordability and we have to really grab this ourselves because the government has not done what they should have done, in our view, to deal with this issue. Land supply constraints have been a real problem in this country. The planning system needs a big overhaul. That lack of land supply has just driven prices up. It’s simply just supply and demand. If the government fuels demand through population growth, through immigration, and doesn’t deal with supply at the same time, then ultimately prices go up. We’ve flagged this to government six, seven, eight years ago and little has been done, so about five years ago we decided that we have to take control of our own destiny, shrink our product and make it more affordable by bringing down the lot size, bringing down the house size and bringing down the price point, and that strategy is working well for us.
Robert Gottliebsen: How do you see the housing market in the various states? You’re obviously doing better in southern Queensland and New South Wales, but how do you see it around the country?
MQ: Well, it varies around the states, but there’s a real paradox here in that the two weakest parts for the last 18 months have been Queensland and Perth; the supposed mining boom states have been actually the weakest. Now, a lot of that is to do with the fact that there was a bit of oversupply that had to be washed through in those markets, but it does seem quite strange that where we’ve got the mining boom, those are the weakest markets. Now, that is starting to change. That excess stock is working through the system and the markets are picking up and we expect that in six or nine months’ time, those two markets will actually be performing quite well. So, around the traps, what we’ll have then is a position where it’s not so much by state, it’s by customer segment where the big changes are. And, basically, if it’s affordable and at the lowest price point, it’s selling well. If it’s expensive, certainly above say$ 1-1.5 million, the market is very, very soft.
RG: What’s the price point that puts people in?
MQ: Well, the rule of thumb for us is, from a land perspective when we sell our land, below $200,000 it’s selling well; above $200,000, it’s challenging, and that comes out to a house and land package price of below $400,000. Our average price point is below $400,000 and so that’s why our market share has gone up. Above $450-$500,000, it’s unaffordable, and we’re actually all become desensitised to the cost of housing. When we actually reflect back to first home buyers coming into the market with a median house price across the country of above half a million dollars, I mean it’s just crazy.
AK: There can’t be too many places in Australia where you can get land for less than $200,000 for a plot.
MQ: Well, in the corridors where we operate we’ve got 28 per cent market share and most product is below $200,000 dollars. It can be done.
AK: Where are we talking?
MQ: The average block size has come down now and about five years ago our average land size was 600 square metres; it’s now down to 450 square metres.
AK: So, the quarter-acre block is dead, long gone?
MQ: Oh, long gone. And block sizes are going to get smaller and smaller.
SB: Matthew, I know you’re in the development business, but you’d be aware of this ferocious debate raging around the countryside about housing prices and whether there’s a bubble or not between people like Steve Keen and Chris Joye on our side. Have you got a view on that?
MQ: Oh, absolutely I have. I mean I watch them sparring regularly. Ultimately, it’s got to be evidence based and whilst Australian housing is expensive by international standards, there’s no denying that, the supply and demand equation means that it’s unlikely that we’ll see any kind of major fall. To get a major fall like Steve Keen has been predicting for some time, would rely on forced selling. Forced selling comes out about because of people... You borrow too much, interest rates go through the roof, massively rising unemployment, irresponsible lending. None of those things have happened in Australia. So, whilst it’s expensive and house prices have softened, we don’t expect any major correction in the housing market. It is expensive and what we’ve got to do is make sure that we can make it as affordable as possible for people because underlying we have a structural imbalance between supply and demand. I should stress though that’s on an absolute basis, Australian housing relative to the rest of the world is expensive, but on a per square metre basis, it is not. And this is one of the things that is sometimes misunderstood because it’s the size of the Australian houses that is the issue. Now, just to give you an example, the average new project home in Australia, a four bedroom new project home, we’re occupying that at a space per person of 83 square metres per person. In the UK, it’s 38 square metres per person. In the United States, it’s 65 square metres per person. So, we’ve actually had the luxury in the past of these massive houses, but we just simply can’t afford them anymore, so I think the quarter-acre block is dead and potentially the ‘McMansion’ is dead as well.
AK: And do you think that our acreage or our square metres per person figure will have to come down? Will it come down to the US level or even perhaps the UK level?
MQ: Oh, ultimately, not the UK level because it’s a different style of housing altogether and I wouldn’t be pursuing that, but if we look at our product mix, for example, if we go back four years, we did not sell any three bedroom homes. They were just simply unsellable because people have been conditioned that you have to have four bedrooms. Even if you’re a new couple with no children, you have to have four bedrooms because that’s what people have been conditioned to expect. Three bedrooms are now our biggest seller and they’re becoming smaller and we’re almost at the point now where we’re actually trialling two bedroom product with a price point – this is at North Lakes in Brisbane. We have a two bedroom product with a price point of $260,000 and they’ve sold out. We launched 60 and we’ve got two left.
AK: That’s house and land, is it?
MQ: House and land, and within reach of the shops, good employment opportunities. And people are saying that it’s more now about what I can afford rather than what I aspire to have. It’s a similar theme in retail. You’ve seen the downturn in discretionary spending. Whilst the non-discretionary spending has actually kept up quite well because people are saying if I can afford it and I need it, I will buy it, if it’s expensive and I don’t need it, I won’t.
AK: If it’s a two bedroom house, where do you put the home cinema and the home gym?
MQ: You go to the local gym and take a good membership I think. And home cinemas with flat screen TVs, I mean it doesn’t have to be large.
AK: But the structural shortage or the structural imbalance between demand and supply – that works in your favour, doesn’t it?
MQ: Well, it does work in our favour because it holds up the market, but it works against us in the long term because all it does is drive unaffordability. And this is one of the messages I’ve been trying to get across to the politicians because they find it strange that we’re actually asking them to release supply. You know, I’m quite happy if they release supply and actually have a moderation in house price growth. If prices remain flat for some time, well we just catch up with affordability and just let incomes catch up a bit. That can only be a good thing. So, the good news is that many of the state governments now get this. In Melbourne, they’re taking a very, very productive approach. In Sydney, we’ve seen a major change since the new state government came into place to actually get the release of the land going and deal with its housing affordability issue. So, the message is starting to get through, but it’s going to be a long, hard road from here to change it.
RG: Can I switch you, Matthew, to the retail sector? And I want to refer to you that graph you have in your presentation which you update each year, and look at the structure of what you call "Super Regional Centres”. That’s not you. This is other groups. And what you’re saying in those groups at about 46 per cent of their turnover is in clothing and discretionary clothing. So, are you talking about Westfields and those sorts of shopping centres in these super regional centres?
MQ: Well, I’m not going to be drawn on talking about specific operators in the industry, but from a general perspective I think when it comes to the big challenges that are faced by retail today, it really comes down to two and that’s firstly the downturn in discretionary spending which is a similar thing to what I’ve just been talking about in housing. There are a lot of people who used to just buy stuff, conspicuous consumption, debt funded consumption. They just don’t do that anymore. And also the threat of online and the two go hand in hand. With online, it’s easy to see the groups and the industries that will actually do okay out of this; food, personal care, hairdressing and so on are going to have a very, very low take up with online and the figures are proving that to date. Music and books will obviously have a much bigger component. The big issue and the big threat for traditional shopping centres is with clothing because they provide the backbone of the shops and the backbone of the rent. And the view we take based on the research that we have done is that clothing that is more high end will be more impacted than clothing at the value end, and we’re actually seeing that in the data that’s coming through, and we actually spend a lot of time with actuaries that we have to research this. We’re actually saying with our malls we’ve actually stopped them at a certain size, at about 250 shops, about 75,000 square metres, and stopped them at a certain price point which is at that middle value range and not go any higher than that.
RG: That’s just the reverse of what the Lowys are doing in their super regional centres. That strategy that you’re adopting is one strategy and Westfield, and not just Westfield – there’s a series of others as well, have exactly the reverse strategy. Chadstone, for example, is going to increase its size 25 per cent. So, these guys that operate these super regional centres believe you are wrong. Is that fair?
MQ: They could, but that’s what makes a market. But it’s all evidence-based at the end of the day. And just one example I will give you about productivity because if we limit the number of shops and have scarcity of the shops, then we will protect ourselves against future obsolescence because it may well be that in a few years’ time, we just won’t be able to lease the number of shops we’ve leased in the past because they won’t need the bricks and mortar exposure that they’ve had. We’re protecting ourselves from taking very much a long-term view with this. If we’re wrong, we can easily make them bigger, but if they’re too big, it’s very hard to make them smaller without actually losing a lot of money.
RG: In my commentary in this interview I’ll actually run your graphs, but you’re showing that in your centres it’s 29 per cent clothing which compares with 46 per cent in the super regional centres which I’m classifying as Westfield and others, so that’s a big difference in the product mix.
MQ: It is, but also you’ve got to look at the composition of that clothing and whether it’s value-end or high-end and we’re actually making sure that we focus on the value and mid-end because that is more internet resilient.
SB: Matthew, you’re obviously still highly confident about the retail sector because you are re-weighting the Stockland portfolio towards retail.
MQ: Oh, very much so, but it’s a question of which retail. And similarly to our residential product, we actually specialise and focus on the mass market segment, which is the most resilient through this cycle. We're very much focused on day-to-day value, convenience and being the destination for the local community. A lot of our centres are in regional areas – places like Rockhampton, Townsville – where there’s a population of 150,000 or 200,000 people and we are the main game in town. And we’d rather be in those good, solid, regional trade areas and be in the number one position than have the biggest centres in some of the metropolitan areas and just fight it out with the others.
RG: Have you ever thought of buying Centro? Because that’s a similar strategy to what they have.
MQ: Well, there are a couple of centres that Centro own that would fit with our strategy, but as far as I’m aware they’re not for sale.
SB: Matthew, you seem to have a different approach for dealing with your tenants than some of the other centre owners. Can you explain that? And you seem to have, well, just a better relationship.
MQ: Well, we do. And this is a strategy we’ve been having for the last decade really. I mean, with every company that sells things to their customers, if the customers aren’t happy then ultimately they’re not going to buy what you provide. And providing retail space is no different from any other sector, we’ve just got to make sure that we are on very good terms with our retailers – because ultimately they have a choice and that’s to lease our space or not. If we make it too expensive for them then they won’t be there. We’ve just got to be making sure we’re in a position where our rents grow in line with their sales and their profitability. In the last twelve months the sales by our small shops – our specialty shops, which are the lifeblood of our shopping centres – grew by four and a half per cent, so well above industry averages. Notwithstanding that, our rents didn’t go up by the same levels. We’re actually letting our retailers catch up a bit and making sure that our occupancy costs as a percentage of sales are quite reasonable.
AK: What keeps you awake at night, Matthew? Is it the potential for a big downturn in the property market or problems with the retail?
MQ: I think there was a big feeling in the housing market a couple of years ago that the sky was going to fall in. And I think we’ve shown now – the industry has shown, and we’ve shown through our strategy – that that’s not going to happen. We can certainly weather the storm and it does feel to me like we have passed the low point in the housing cycle. If I look at our forward indicators, it seems to me that the low point, certainly for our product segment, was about six months ago. So I don’t think I can say that anything keeps me awake at night. One of the things that I would love to have, that we currently don’t have, is a much more streamlined government between the various levels of government. It doesn’t keep me awake at night, but it certainly frustrates me.
SB: Matthew, you’ve got a historically very lowly geared balance sheet and no major refinancing this year, but in the rest of the sector there is quite a lot of maturing debt. Is there a potential for instability in the sector, as opposed to Stockland, if the eurozone crisis flares up again?
MQ: Well, I hope not. I really do, but if it does then we can weather that as well because we’ve put our debt out long. And no disrespect to the local Australian banks, but we have a very, very low exposure; only ten per cent of our debt is from the local Australian banks. And even with those, it’s all on a direct basis with no syndication. From my experience, having overexposure to banks – and certainly with syndicated bank loans – is not a good place to be. And we’ve made sure we have the very low exposure to them.
AK: Just looking at the future, the trends you’re talking about of smaller houses – two bedroom, three bedroom – being now your biggest seller, they must by definition be low on margin. That must be a low on margin business. Is your business turning into a lower margin business than it was before?
MQ: Well, it’s actually not. The margin as a percentage of sales is about the same irrespective of the size of lot. As lots get smaller, we get a higher price per square metre and we’re able to maintain our margins on a percentage basis, but potentially the price point will come down, which means that we need to sell more volume to maintain the same dollars. And our business is now about driving volume and that’s one of the reasons we’ve acquired a lot of land in the last three years, so that we can spread ourselves across a greater number of projects and increase our volumes. But margins as a percentage remain about the same.
RG: Matthew, you seem to be concerned about the situation of middle and upper middle Australia. They’re the people that have got the million dollar plus houses. They’re the people that have got the four bedrooms and more. And they’re the people that are actually changing their retail spending habits, or tend to be. Are we looking at a revolution in what’s taking place in middle and upper middle Australia?
MQ: Well, I’m not sure if it’s a revolution, but one of the interesting things, and this is a very longer-term view as strategically might be happening, but if you look at a chart of income inequality, and not just in Australia but in the United States and in the OECD, income inequality has got worse and worse and worse over the last twenty years. And I think there are a lot of signals that are now coming from government. If you listen to Barack Obama’s speech from a couple of weeks ago, the potential new French president and even signals that are coming in Australia, with the abolition the other day of the healthcare rebate, there seems to be a tendency by government to looking after our customer segment at the expense of those upper segments to address this income inequality issue. So, we are mindful of this and it’s one of the things that are driving our strategy. It might not be the primary driver, but it’s something that’s definitely on our mind as an observation as to how governments are acting these days.
RG: Matthew, in your business is there anything you’re particularly proud of in terms of ways of improving your efficiency?
MQ: Well there are, but it’s not just improving the efficiency of how we deliver what we do, it’s making sure that we are delivering products and services that people want. And I’m very proud of the fact that through our housing affordability strategy, we’re actually enabling people to buy into housing that they previously weren’t able to. One of the frustrating things to me is the number of people I talk to – young people who are coming through into work in their mid-twenties, who have got good jobs, a young couple for example – who have started saving but are caught in the rental trap. And historically people in that position were able to move into home ownership quite seamlessly by borrowing a reasonable amount of money and being able to service it, but even these days for people on the average income it’s very, very hard for them to get into housing. And one of the philosophies we have which we’re driving with government is a very easy proposition. It’s that the median priced family, the people on the median income, should be able to afford the median house. Right now they are way off the pace because of this government inaction on supply. And I’m proud of the fact that we can allow a lot of people to get into home ownership at a more affordable price.
SB: Matthew, you’ve been selling down your exposure to office and industrial, but you’ve still got something like $3 billion dollars tied up in them. In two or three years’ time, will there be any exposure in those sectors?
MQ: Well, we’re selling at a rate of about four hundred million dollars a year and we’re doing that to effectively re-rate from our office space into our retail development. We always want to be in a position where about two thirds of our income comes from rent because that really gives us a solid backbone. It means we can really predict our earnings and quite well, and it means that we can maintain an A-minus credit rating. So this is a switch from office into retail, not a wholesale selldown that would put our earnings at risk. So over time, maybe over five, six, seven years we will sell down completely, but it will be done on a very measured basis.
RG: Why are you so bearish about office?
MQ: The problem with office space, and the challenge, is that it is highly commoditised. And despite the fact that white collar employment is trending down and demand is quite patchy, new supply keeps on coming out of the ground. And as long as that happens and incentives remain very high, it’s very, very hard to make money out of being in office space. To really make a lot of money out of being in office space, you’ve either got to be a very long-term holder and be able to ride the fluctuations, or a short-term trader – and neither of those really fit our capital structure. Neither fit in terms of having a very predictable rental stream. Retail is a much better and safer bet for us and much more predictable.
AK: Matthew, it’s been great.
SB & RG: Thank you, Matthew.
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