The booming property markets in Sydney and Melbourne may be concerning for some investors, but property developers like Mirvac Group (ASX: MGR) are certainly not complaining.
Two weeks ago Mirvac confirmed it was on track to achieve its FY15 operating earnings per security guidance of between 12.2 and 12.3 cents per stapled security on the back of strong momentum in its residential business.
At the current share price, Mirvac is trading at around 15x FY15 earnings. This seems fairly attractive considering the strength in the property market is expected to continue for the short term at least. Add a dividend yield of around 5% and the proposition looks even better.
But should investors buy Mirvac on the back of a property boom that hasn't been seen for decades?
Only time will tell, but for those investors considering investing in Mirvac, here is a quick summary of its core operations:
Background
Mirvac is one of Australia's largest property developers with a market capitalisation of nearly $7 billion. The company not only develops residential property but also invests in and manages commercial, industrial and retail real estate.
Office Portfolio
Mirvac's office portfolio is worth $4.1 billion and boasts some of best known buildings in the CBDs of Sydney and Melbourne. The occupancy rate for this portfolio is 95.5% and the company has a $1.3 billion office development pipeline that is currently being constructed.
The major risk for the office portfolio is that more new office floor space will be hitting the Sydney market over the next couple of years than ever before. Although occupancy rates are high at the moment, if demand does not increase for this new floor space then yields will certainly need to fall in order to keep tenants from moving to cheaper leases.
As the chart below illustrates, this issue will be magnified from FY16 as the number of leases due to expire increases dramatically.
Source : Mirvac 3Q Update
Retail
Mirvac's retail portfolio is worth $2.1 billion and is concentrated primarily in key urban markets with 67% of the portfolio located in Sydney.
Mirvac enjoys an exceptionally strong occupancy rate of 99.1% and has most recently provided figures that show retail sales in its properties have increased by more than 3% over the last year.
Although poor consumer sentiment has dampened retail activity over the past few years, Mirvac is confident that low interest rates, coupled with improved activity in the housing market in Sydney will continue to underpin growth in the retail sector.
The benefits of being primarily exposed to the Sydney market has proven positive so far for Mirvac, but future weakness in the property market remains a risk.
Industrial
This is Mirvac's smallest portfolio and is worth $631 million. It is made up of seven properties including one in the US and there is a $121 million industrial development pipeline.
The occupancy rate is also very high at 99.6% and the average length of leases before expiry is 7.8 years.
Residential
Mirvac has been able to take advantage of the housing boom in Sydney and Melbourne with strong residential sales for FY15. The group is looking to settle over 2,200 residential lots and has secured pre-sales of $1.6 billion that should be settled over the next three financial years.
The group has a strong pipeline of around 31,000 lots and has been increasing the number of lots released to capitalise on the favourable market conditions.
The biggest risk for Mirvac's residential business is the increasing number of new apartments being constructed in Sydney. There has been a long period of under-supply in the market but that is expected to end as a number of very large apartment projects are expected to finish this year.
Foolish takeaway
Although Mirvac's strategy to be exposed primarily to the Sydney and Melbourne market has proven successful so far, the current market conditions seem unsustainable.
Mirvac could potentially be over exposed in these cities and a correction in property prices will see the share price come under pressure.
As a long term investor I don't think the risk-reward trade-off is attractive enough at the current share price and I think investors should wait until the shares becomes substantially cheaper before buying.
