The place for residential property in A-REITs

The long-term prognosis for Australian residential real estate is sound. Australia’s population is forecast by the Australian Bureau of Statistics to grow from around 22.4 million in 2011 to 30.9 million in 2031, an increase of 34.6%. This underwrites residential property demand. The deficiency in numbers of dwellings increased from an estimated 22,700 in 2006 to an estimated 124,400 in 2011 according to BIS Shrapnel. This supports price stability. 

A-REITs such as Mirvac, Stockland and Australand have exposure to the residential property sector through residential property development. These A-REITs also have exposure to other asset classes such as office and retail. Recent sentiment towards those A-REITs with significant residential property exposure has been negative. Stockland recently revised down its 2012 financial year earnings estimate as a result of deterioration in the number of lot sales and settlements and adverse weather in NSW disrupting development. This revision was released only six weeks after the group reaffirmed earnings estimates in its first-half results announcement. The result was a 7.3% fall in the share price in the month of March. Compounding this have been tougher lending requirements for both home buyers and property developers. 

A-REIT balance sheets are sound and gearing levels are moderate. The larger diversified groups are able to pre-fund infrastructure works which are important in establishing buyer confidence and aesthetic appeal in a green-fields residential development. Sales volumes are currently more robust in lower value residential property. As a consequence, groups like Stockland are adjusting their planning to accommodate a higher proportion of lower price and smaller lot size residential product. 

Despite the current funding and sentiment challenges, those A-REITs with the capacity to deliver suitable residential product to meet the market will flourish over the medium to longer term.