Stockland buying up all around
Rebecca Thistleton
1339 words
4 Aug 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
When Singaporean property giant Frasers Centrepoint lobbed a $2.6 billion cash bid for listed developer Australand in June, it appeared to leave an unsolicited scrip bid from Stockland made two months earlier in tatters.
While analysts and investors believe it unlikely that Stockland would sweeten their offer, the option remains until Frasers' takeover offer closes on August 7.
Stockland has hardly sat back waiting in the meantime. The group has since bought up new properties around the country and, as The Australian Financial Review revealed in late July, is running the ruler over Leighton Properties' $7 billion portfolio.
Regardless of whether or not an Australand takeover is successful, Stockland is set to grow.
The group, led by ex-UBS boss Mark Steinert, is on track to record 5 per cent growth for the year. About 60 per cent of the group's revenue is from rents, which represent about 3 to 4 per cent growth.
The rest has needed to come from the riskier development arm of the business.
Stockland is one of the country's biggest diversified managers and developers and enjoys steady revenue streams across businesses, but it has made no secret of the desire to cash in on an upturn in the housing market and the offshore appetite for Australian housing.
It acquired a 19.9 per cent stake in Australand in March, which was an opportunity to quickly expand its industrial portfolio and benefit from their medium-density apartment portfolio when demand for units stands at record highs.
The takeover bid came a month later and Stockland's mostly scrip offer stands at $4.54, while Frasers Centrepoint has offered a $4.48 all-cash bid.
A bidding war between Frasers and Stockland over Australand is unlikely.
But though Stockland has said their offer is final, market buzz suggests a counter-offer cannot be discounted entirely.
Then there is the Leighton bid. Singapore's largest listed developer, City Developments, is also in the running for the residential and office portfolio, which could sell for about $500 million.
By the time Stockland reports on August 18, the market will have a better sense of Australand's future ownership and what Stockland plans to do with its near-20 per cent holding.
One certainty is that when Steinert delivers his address, strength in the new housing market and future opportunity for further investment there will be a strong point.Primed for organic growth
Regardless of whether its takeover wishes for either Australand or Leighton are granted, Stockland is still poised to expand its portfolios and the group is primed for organic growth in its industrial and residential businesses.
Steinert's predecessor, Matthew Quinn, stuck to three key portfolios – known as his "three R strategy" – retirement, residential and retail.
Since coming on board at the beginning of 2013, Steinert has sought opportunities to grow beyond those core areas.
He recently told Morningstar the group saw good long-term risk-adjusted returns in industrial development and ownership, and that he did not believe the risk profile was remarkably different between industrial property and the other commercial sectors.
Not long after making its play on Australand, the group paid $53.5 million at the end of June for the 12-hectare Brownes Dairy site in Perth. It was the third major industrial acquisition for the 2013-14 financial year after buying warehouses and industrial land in Sydney.
Stockland is understood to be working on further industrial acquisitions.
Steinert has also flagged an opportunity to sell part or whole interests in some of its more mature assets, particularly from its office portfolio, and to move that money into its shopping centre development pipeline.
The group's shopping centre developments have shown 12 to 14 per cent total returns and stable yields around 7 to 8 per cent.
At the same time, Steinert has reassured investors that he would not stray from Stockland's traditional approach to asset allocation.
But beyond Stockland's core investment holdings, the upcycle in residential and retirement presents major opportunities for growth.
Stockland retirement chief Stephen Bull told the Financial Review in July the group still wanted to expand its presence in that sector, after the paper's Street Talk column revealed the group was planning to sell off 11 retirement assets worth $60 million to $70 million.
In the residential business, house and land is Stockland's bread and butter. But its medium-density projects and built-form housing investment are set to rise.
The move to built form stems from where demand in the housing market is coming from. Stockland estimates about 15 per cent of buyers want a house-and-land package; the rest want finished homes.
So while moving into built form is seen as a new move for Stockland, it could be a low-risk way to expand the group's housing pipeline, given the strong demand for residential property.
While there has been some softness in Victoria's house and land market, projects in Sydney continue to sell out early.Phenomenal new-home buyer response
Stockland's NSW residential general manager, Jeremy Bryden, described the response from new-home buyers as "phenomenal": the group's latest release in Sydney's north-west at Marsden Park was a sellout. So long as interest rates remain low, demand for new housing is expected to continue.
At the same time, about half of Stockland's residential customers are first-home buyers and that target market has been hit by a severe lack of affordability, particularly around Sydney.
The heat in Sydney's housing market has led to prices growing 14 per cent higher in the year to July, according to RP Data's latest figures, released on Friday.
If market sentiment were to shift or interest rates to rise, the group's diversification within its residential portfolio offers a broad buffer.
Stockland has about 65 residential projects under way and they are spread across the country.
Property pundits have tipped Queensland as the market ready for price growth and it appears Stockland is in agreement.
Steinert addressed a Property Council function in Brisbane in late July talking up the group's interest in that market, noting there is about $3.3 billion invested in the state. Stockland intends to invest at least another $3 billion there over the next five to six years. "The quicker we can get that on the ground the better," he said.
He has also talked up a wish to have more medium-density projects in the pipeline.
However, Stockland has not targeted offshore investors with residential projects the way other listed developers have, although its stake in Australand has exposed it to the lucrative Asian investor market .
UBS research recently singled out Lend Lease and Mirvac as the best placed listed groups to capture foreign demand for housing. Almost 80 per cent of foreign approvals for new housing has been centred around NSW and Victoria, much of that in high-density projects around the CBDs.
That demand was reflected in Australand's strong results posted in its July half-yearly report. Securing Australand would be one way Stockland could tap into potential future gains.
But the more likely outcome is that Frasers will be the winner and there is every chance Stockland will negotiate an asset swap in exchange for accepting the offer.
Still, CLSA's head of Australia real estate, John Kim, expects Stockland to have another go and up its appeal with a combined cash-and-scrip offer.
However, if that were to happen, there is every chance Stockland's share price would drop. Its share price is crucial as it determines the value of a scrip bid.
Frasers would then have the option of exercising matching rights.
Selling out of its near-20 per cent stake in Australand could be the group's next move.
If Stockland does sell, it will take home $85 million in profits.
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