Australand Holdings

At Australand’s recent annual meeting the property developer and owner reiterated that it expects the distribution to be held flat at 21.5 cents in 2012. With the security prices of property groups buoyed by the recent cut in the official interest rate to 3.75%, Australand’s yield has fallen to 7.8%. That’s enough to keep the company in our model portfolios, but we’d reassess if the security price increased 10-15%.

The residential property development division has produced unsatisfactory returns on capital since the GFC; something lower interest rates won’t fix. The industry has too many players, and the onerous cost of land, labour, materials and infrastructure, combined with weak demand and low credit growth, will hamper returns for years to come. With Australand trading at a 21% discount to net tangible assets per security of $3.46, this is reflected in the security price.

Australand’s distribution is underwritten by a $2.2bn property portfolio that barely has a vacancy. In 2013, 15% of leases (measured by income) expire, followed by 14% in 2014, but re-signing tenants shouldn’t be a major problem without an economic shock. Vacancy rates remain low (just 3.9% in Melbourne, for example), and 80% of available leases at the newly refurbished 357 Collins Street development in Melbourne are now pre-committed. Management will be hoping to lease the remaining space before opening the doors in a few months.

Australand’s security price is up slightly since 9 Feb 12 (Hold – $2.67), and we’re sticking with HOLD.

Note: The model Growth and Income portfolios own securities in Australand.