The booming Australian property market has sent a rocket up the share price of property developer Lend Lease Group (ASX: LLC) over the past two years. During that time, the stock has outperformed the S&P/ASX200 (ASX:XJO) (Index:^AXJO) by more than 60%!
With the likelihood that interest rates will be staying lower for longer and some analysts predicting further gains in the property market to come, investors would be wise to keep an eye on property developers like Lend Lease and Mirvac Group (ASX: MGR).
Lend Lease is a complicated business but for those investors who want a head start in their own analysis, here is a quick summary about two of its core portfolios:
Background
Lend Lease is an international property manager and developer with a market capitalisation of around $9.2 billion.
The group has operations in Australia, Asia, Europe and the Americas and also controls a substantial international investment property portfolio worth $17.4 billion.
Investors should note that 70% of Lend Lease's earnings are generated in Australia.
Residential and New Community Portfolio
Lend Lease's residential portfolio has been performing strongly on the back of increasing property prices in most of Australia's major capital cities as well as in London. The group has a portfolio of over 20,000 residential properties with 4,000 of these currently in the delivery stage.
$3.6 billion worth of pre-sales have been locked in for the next three financial years that management believe will drive growth and provide good earnings visibility.
Investors need to be aware however, that the combination of high property prices along with low interest rates has provided a trigger for an increased supply of new properties by a number of major property developers. This has been clearly evident in the Sydney market and the bulk of these new large apartment buildings will be completed towards the end of this year. If the market begins to cool at the same time, there could be some downside risk for Lend Lease and investors should keep this in mind.
Management has also pointed out that the surge in land prices in Australia is now making new community projects less attractive compared to previous years. As a result, Lend Lease has been looking to expand its urban regeneration operations abroad, especially into Asia and the Americas.
Commercial Portfolio
Lend Lease has six commercial towers currently being finalised or in the delivery stage. It is expected that these projects will become net cash flow positive in FY16.
The group also recently announced it has finalised an agreement with Crown Resorts Ltd (ASX: CWN) for the development of a world-class integrated resort and casino at Barangaroo in Sydney. The contract for the development of the project is estimated to be worth around $1 billion and provides Lend Lease with a low risk, high-demand opportunity to grow earnings from this portfolio.
The main issue facing Lend Lease's commercial portfolio is securing tenants for its new towers that are under construction. The group still has a number of towers without secured tenants and although there should be strong demand for these spaces, Lend Lease cannot afford to have those buildings being vacant for any extended period of time.
Valuation
At the current share price, Lend Lease is trading at around 15x FY15 estimates. Investors can also expect to receive an unfranked dividend yield of around 4%.
So now what?
I would suggest investors undertake some serious research into Lend Lease before buying as it has many moving parts that can be difficult to understand.
With that in mind, the shares look fairly valued at the moment and I think it is a hold at these prices. I would not expect the same increase in the share price over the next two years, but the combination of low interest rates and high property prices should see Lend Lease deliver above average earnings growth for at least the next year.
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