Australand Holdings

Since we upgraded Australand on 22 Jan 10 (Long Term Buy – $0.475), the security price has increased 23% (after factoring in a one-for-five security consolidation), and it’s up 11% since our recent review on 21 Apr 10 (Long Term Buy – $2.65).

Though we’re pleased Mr Market has returned to his senses in relatively short order, on the flipside Australand’s forecast yield has dropped from 8.4%, to a less attractive 7.0%. Admittedly, that’s more than your local bank manager is likely to offer you. But because Australand’s properties are almost packed to the rafters, higher distributions from here will be tied to a recovery in development profits (which management expects in 2011).

In contrast to gouging higher rents from tenants, property development is risky business. Though we’re relatively comfortable with Australand’s track record, we’re not prepared to pay a premium for the development side of the business, as it’s vulnerable to swings in demand and interest rates. Instead, we consider it icing on the cake.

So although we’re comfortable collecting distributions from here, with the security price bursting through our safety margin (as you can see in the accompanying recommendation guide), we’re switching to a more conservative stance. HOLD.