Stockland's Quinn leaves on a win

Despite a 7 per cent drop in earnings, Stockland is in a good position going forward thanks to a cleverly restructured commercial tenancy register and hopes that residential housing is nearing its bottom.

When he flagged his retirement last month, long-serving Stockland chief executive Matthew Quinn described the housing cycle as the worst he has seen during his long career in the property sector. The presentation for today’s Stockland result provides some context for that comment.

With an overall result that was in line with the group’s downgraded guidance, the most notable feature of the 7 per cent fall in group earnings was a 15 per cent decline in the contribution of its residential communities division – despite record settlements and steady prices.

There was a tone of slight bemusement to the presentation because in Stockland’s view the fundamentals for the residential property market are strong, with the market under-supplied, it believes, by between 130,000 to 240,000 homes.

Until the financial crisis erupted, there had been a strong correlation between population growth and dwelling starts and, while they fluctuated, demand and supply were broadly balanced.

The crisis, however, has produced a decisive break away from the longer term trends, with dwelling starts declining slightly even as population growth spiked, leading to the claimed shortfall in supply. Consumer anxiety and the continuing issue of affordability, however, has meant the shortfall hasn’t been reflected in pricing, which in Stockland’s case is flat-lining.

That’s despite the Reserve Bank cutting official interest rates four times in the past nine months, by a total of 125 basis points. Traditionally rate cuts have flowed almost immediately through to housing market activity levels.

Stockland said that before the financial crisis a 2 per cent rate cut would result in a 10 per cent increase in housing credit growth; post-GFC it has resulted in only 3 per cent credit growth. In past cycles dwelling approvals picked up within three months of a rate cut; today approvals have declined.

Stockland has started this financial year with only 1561 deposits for its houses, 700 less than last year. It points the finger at Victoria, where it says 2011-12 activity was boosted by government stimulus. Victoria, of course, has been most adversely affected by the pressure on manufacturing industry generated by the strong dollar and the post-GFC defensiveness and deleveraging within business and households.

In 2011-12 the margin within the residential communities division fell from 29 per cent to 25 per cent. Stockland obviously doesn’t expect any immediate improvement in the environment for new housing because it expects further margin compression this financial year, although it says there are signs that the market is near the bottom.

Given the overall state of the residential property market, where prices have been sliding over the past year, there is no particular reason for buyers to rush into the market even in the lower rate environment. The shortfall in supply, however, does provide some underlying support for prices.

There was a somewhat happier outcome within another segment of Stockland’s businesses that has also been under pressure. It has become increasingly evident since the financial crisis that there are both cyclical and structural changes occurring in retailing that have combined to exert acute pressure on the sector.

As a major owner of retail property centres Stockland might be expected to have shared some of that pain. Its retail division, however, produced a respectable 8 per cent improvement in earnings, with near 100 per cent occupancy of its centres. The centres generated average turnover of $7526 per square metre compared to the industry average of $6571.

Quinn recognised quite early that the post-GFC downturn wasn’t just cyclical but was, with the boost from the Australian dollar, accelerating a structural shift in retailing as online sales started to grow from a modest base.

While the rate of growth in online sales has slowed recently, they now account for more than 5 per cent of total retail sales. That has obvious implications for traditional retailers and their landlords.

Stockland’s response was to accept that the online channel would continue to grow and recognise that by far the largest segment of those online sales was fashion.

It has re-weighted the tenancies in its centres away from fashion – only 25 per cent of the capacity of its centres is devoted to fashion against an industry average of 33 per cent – and towards food and services, while also shifting the emphasis within its clothing tenancies towards the value end of the market. About 56 per cent of its specialty clothing retails are in that segment, against an industry average of only 5 per cent.

While the flagship retail centres, like Chadstone in Victoria or Westfield’s Bondi Junction have established themselves as destinations and are therefore less vulnerable to the combined effects of a retail recession and the gathering momentum of the invasion of the online retailers, lesser centres are going to have to emulate Stockland and shift the mix of their offering away from the more vulnerable categories or face a reversal of the historical trend of ever-increasing rental income streams and centre valuations.

Quinn may have wished for a somewhat brighter note on which to end his 11-year tenure as Stockland’s chief executive but in both the retail and residential properties divisions he has positioned the group at the value end of the market, which is enabling it to work through some very difficult conditions and which will leave it well-positioned for any improvement in the environment.

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