Australian Homebuilders Can’t Give Them Away: Mortgages

Australian homebuilders are resorting to discounts, gift cards and help with mortgage payments to lure reticent buyers.

Stockland (SGP), Australia’s biggest residential developer, is giving rebates and gift cards of as much as A$30,000 ($31,300) in Victoria, Queensland and New South Wales states. Devine Ltd. (DVN) is matching deposits in South Australia and taking over mortgage payments for as long as a year in Melbourne. Peet Ltd. (PPC) has been offering discounts of as much as A$50,000 in Western Australia, Queensland and Victoria.

Central bank interest rate cuts of 1.75 percentage points since November 2011 have failed to spur housing demand amid slowing job growth. New home sales in December were 6.6 percent below the level of a year earlier, and loan approvals to build or buy new homes the same month were 31 percent below an October 2009 peak.

“The discounts this time ’round are bigger than we’ve seen before because the response we’ve seen to rate cuts has been far more muted,” said Stuart Cartledge, managing director of Melbourne-based Phoenix Portfolios, part-owned by Cromwell Property Group. (CMW) “Affordability based on mortgage costs has improved, but people are worried about losing their jobs. House buyer confidence isn’t there.”

Photographer: Ian Waldie/Bloomberg

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Photographer: Ian Waldie/Bloomberg

A pedestrian walks past property listings displayed in the window of a real estate agency in Sydney, Australia.

Negative Surprises

Developers, including Stockland and Peet, have said they’re facing the worst housing market conditions in 20 years and expect little change in 2013. Stockland, Mirvac Group (MGR) and Australand Property Group (ALZ) may report “negative earnings surprises” in the fiscal year ending in June, John Kim, Sydney- based head of Australian property research at CLSA Asia-Pacific Markets, said in a report Jan. 29. Kim expects Stockland’s shares to underperform peers, while he gives an outperform rating to Australand and Mirvac. Both benefit from non- residential revenue sources.

Sales of new homes fell to 5,875 in December, compared with 6,287 a year earlier, figures from the Housing Industry Association show. The number of loans to build or buy new homes fell to a seasonally adjusted 7,189 in November, from the previous high of 10,457 in October 2009, according to the Australian Bureau of Statistics.

Australian home-building approvals unexpectedly declined for the second time in three months in December. The number of permits granted to build or renovate houses and apartments fell 4.4 percent from November, the Bureau of Statistics said in Sydney yesterday.

Building approvals in December advanced 9.3 percent from a year earlier, yesterday’s report showed. That compares with economists’ forecast for a 14.9 percent rise year-over-year.

Housing companies’ shares are likely to have the worst performance of all property groups, Tony Sherlock, Sydney-based head of property research at Morningstar Australasia Pty, said in a telephone interview. “Pure play” residential groups such as Peet, Devine and Sunland Group Ltd. (SDG) will struggle, he said.

Prices Fall

Home prices fell 0.4 percent across Australia’s eight major cities in 2012, to an average of A$483,000, after dropping 3.8 percent the previous year, according to the RP Data-Rismark home value index. The biggest decline in 2012 was in Melbourne, where prices fell 2.9 percent. Prices in Sydney in New South Wales state and Perth in Western Australia, both of which are seeing growing populations amid a shortage of homes, rose 1.5 percent and 0.8 percent respectively.

Still, a gradual recovery is beginning with prices of detached houses in the nation’s eight state and territory capitals rising 1.6 percent in the three months to Dec. 31, government figures today showed. Perth had the biggest gain, while Melbourne and Brisbane were among the worst performers.

The Reserve Bank of Australia today held its benchmark interest rate at 3 percent, matching a half-century low. It noted increasing home prices and signs housing construction is reviving, in a statement accompanying the decision.

Two Speed

Australia’s two-speed economy -- where mining regions like Western Australia thrive while manufacturers, retailers and builders in the south and east struggle -- has created disparities in the housing market. Prices may jump as much as 7 percent in Perth, remain unchanged in Adelaide, in South Australia, and rise a maximum 3 percent in Melbourne this year, Sydney-based researcher Australian Property Monitors said.

Melbourne, Victoria’s state capital, is facing a “looming oversupply” of new apartments, APM said. The city has the nation’s most over-supplied housing market after a building boom driven by forecasts for higher demand that didn’t materialize as population growth slowed.

“We’re still getting new supply coming through in Melbourne and we have a flat market in terms of buyer demand,” Andrew Wilson, senior economist at APM, said in a telephone interview. “This means developers are competing amongst each other for a smaller pool of buyers.”

Value Adding

Stockland reported a 35 percent drop in profit in the year ended June 30. It said in December that earnings for this fiscal year will be at the lower end of its previous guidance of 10 percent to 15 percent below fiscal year 2012 because of challenging conditions in Victoria. The shares rose 11 percent last year, trailing the 15 percent gain in the benchmark S&P/ASX 200 Index. They rose 0.6 percent at the close of trading in Sydney today, compared with a 0.5 percent drop in the benchmark.

“Rather than reduce the price, developers offer incentives as a value add,” said David Milton, Sydney-based managing director for residential projects at broker CBRE Group Inc. “Where the incentives make good financial sense, they have a very positive effect.”

Cash Rebates

Stockland is offering A$10,000 cash rebates on house-and- land packages at suburban Melbourne projects, as much as A$30,000 in New South Wales, and gift cards worth as much as A$15,000.

The company offers incentives throughout the year and special marketing campaigns during the spring and summer peak selling seasons, Mark Hunter, chief executive officer for residential at Stockland, said in an e-mailed response to questions.

Stockland will see “negligible” earnings growth until fiscal year 2017 because of its exposure to residential development, Morningstar’s Sherlock wrote in a Jan. 22 report. With 45 percent of its land bank in Queensland, which has seen overbuilding in some areas, Stockland will experience lower margins as distressed rivals offload properties, wrote Sherlock, who has a hold recommendation on the stock.

“We’re confident that fiscal year 2013 will be the low point in our earnings and we are well placed to achieve earnings growth from fiscal year 2014 and 2015 as we bring a number of major new projects to market,” Stockland’s Hunter said. “This is a cycle and it will turn; it’s just a question of when.”

Other incentives include half-price furniture packages, offered by closely held Melbourne-based Pellicano Group. Pellicano spokeswoman Elisa Bonomi declined to comment.

Landscaping Offers

Perth-based Peet has landscaping offers as well as discounts starting at A$10,000. Peet reported a 76 percent slump in net income in the year ended June 30, citing deteriorating market conditions and said it didn’t expect much improvement in the following year. Peet shares fell 0.8 percent today, paring this year’s gain to 5.8 percent.

The incentives “are designed to boost affordability and encourage homebuyers to explore property ownership at a time when lower interest rates alone have not been enough to raise consumer confidence,” Brendan Gore, chief executive officer of Peet, said in an e-mailed response to questions.

Government Handouts

The offers add to efforts by state governments and the Reserve Bank of Australia to stimulate demand. Queensland, New South Wales and South Australia are paying A$15,000 to buyers of lower-end new homes, according to state announcements made in 2012. New South Wales and South Australia are also offering additional refunds on newly built homes and land.

Standard variable home-loan costs were at 6.45 percent as of Jan. 31, the lowest since November 2009, as the central bank reduced its benchmark rate.

Still, Australia posted its worst back-to-back years of job growth since the 1997 Asian financial crisis, with the number of construction jobs falling by 21,900 in the 12 months through November, according to government figures.

Building Downturn

Builders are unlikely to see a reversal of the downturn this year after sales and profitability continued to decline in the fourth quarter of 2012, industry group Master Builders Association said in a release on Jan. 21.

Home builder Devine saw 754 residential lot settlements in the year to June 30, less than half the volume of the previous 12 months, according to an earnings release in August. The Logan City, Queensland-based company attributed the decline to weak demand, and economic and employment uncertainty. It turned to a loss in the 12 months ended June 30 from a profit the previous fiscal year. Devine Chief Executive Officer David Keir declined to comment.

The company’s shares fell 1.8 percent to 83.5 Australian cents, trimming this year’s gains to 16 percent.

“It’s a case of reluctance of owner occupiers to take on new properties,” said Craig James, a senior economist at a unit of Commonwealth Bank of Australia. (CBA) “Developers are looking to possible incentives to get revenue coming through. If a developer hasn’t got to offer incentives, they won’t.”

To contact the reporter on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net

To contact the editors responsible for this story: Andreea Papuc at apapuc1@bloomberg.net; Rob Urban in New York at robprag@bloomberg.net

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