It is our house view that the house prices in Sydney and Melbourne are growing at a unsustainable rate. We are generally cautious on the Australian real estate sector however the given the RBA rate cuts, we are changing our view that Australia house prices are set for a hard landing.
The weak inflation rate has given way for RBA to continue to cut interest rate which will support the housing sector in the short and medium. There will be no quick collapse of house prices but a possibility of treading water or deflation for a prolong period.
Recent weak inflation number is not a healthy sign for the strength of the underlying economy. A collapse house price and increase settlement risk for mortgages is conditional on increase in unemployment rate which is not materializing.
As facts change we change our mind. The reduction in interest rates will support residential and commercial real estate values. Given our changed view we have added MGR in our portfolio given its relative value and attractive real estate sub sector exposure.
Mirvac is one Australia’s largest commercial landlord as well as residential developer. It is a staple security of a Australia Real Estate Investment Trust, commercial and residential developer.
ASX MGR has traded at a discount to peers due to its exposure to residential developments. Specially, the products MGR specializes are inner city apartment and integrated community complexes like Sydney’s Harold Park. It is only recently given the strong house prices in the major capital cities that its residential development business will be ramping up earnings.
We like the pipeline of future projects and sees the settlement that the market has priced in (similar to the Lend Lease share price) as secondary and would not be material.
As the residential development business chugs along. The commercial real estate portfolio pays the dividends. It owns some of the best commercial office buildings in Australia.
On the development side, it will complete the construction 200 George Street in Sydney and Treasury building in Perth. The pipeline includes the redevelopment of Australia Technology Park.
In our view the cap rate compression is so 2015. The multiple expansion of commercial buildings in Australia is over for this cycle. Further increase in property values will be conditional on growth in net effective rental. It just so happen Mirvac portfolio predominately positioned in the 2 major markets that will benefit from office rent growth, Sydney and Melbourne.
Another aspect of the MGR we are like is its retail portfolio. We consider retail assets in commercial real estate to be attractive on a relative basis. Aside from stability of income generation, it has a pretty good development pipeline. Following the refurbishment of Broadway Shopping Center, potential future development includes Harbor side Shopping Center at Darling harbor.
It has gradually repositioning its retail assets in focusing on assets in high density locations. Mirvac announced the purchase of Toombul Shopping Center for $233.3 million at a 6.5% cap rate.
We would rather own own a multi tenant shopping center with a major department store (Myer, David Jones, Woolworths (WOW ASX) or Coles (WES ASX)) rather single asset industrial sheds at the same cap rate. Retail asset weighted average lease expiry are usually lower due to volume of retail leases. Typical retail leases are only 5 years with option not counted in WALE.
Mirvac dividend has been stable post the financial crises. The lessons of the GFC are still very alive in the current senior managements across the sector as well as the banks. We would not expect anyone to go crazy with debt this cycle.