Weak housing market claims another victim

Weak residential sales hammer property developer

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 17, 2012 3:40 pm AEDT

Real estate property developer, Stockland (ASX: SGP) shares have slumped in trading today, following the company's announcement of an expected fall in earnings in the 2013 financial year.

Managing Director Matthew Quinn has reiterated that this is the worst new housing market he has seen in 20 years (echoing comments by Boral Limited's (ASX: BLD) chief Ross Batstone in July). Earnings per share in 2013 are expected to be 10% below last year, and could be down as much as 15%, if conditions don't improve in Victoria.

Victorian sales volumes have halved following the end of the state government stimulus on 30 June 2012, and aggressive discounting has been needed to clear stock. While conditions remain challenging in the residential market, much of Stockland's earnings are recurring income from rent generating assets.

The company's $5 billion shopping centre portfolio continues to perform well, and is expected to achieve 2-3% net income growth in 2013, compared to the previous year. That's similar to the 3.1% growth that Westfield Group (ASX: WDC) reported for the first six months to June 2012.

Stockland still expects to pay out 24 cents in dividends next year, despite the lower earnings, which the company is justifying based on the company's outlook for 2014. Management believes major new residential projects and recently completed projects should see strong earnings per share growth in 2014.

The October rate cut by the Reserve Bank of Australia and expectations of further interest rate cuts within the next few months should offer some level of relief for property developers and building and construction companies, including Brickworks (ASX: BKW) and CSR Limited (ASX: CSR). That may also see growth in housing demand, and a rise in house prices, which should benefit Stockland further.

The Foolish bottom line

The end of the state government stimulus for new home buyers, combined with the deep cyclical downturn in the housing market has already hit Stockland, and interest rate cuts have come too late to help the company. However, all cycles turn, and Stockland will benefit when it does.

If you only invest in one company this year, make it our "Top Stock for 2012-13". Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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