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04-10-2015, 11:48 PM
Apartment default risk rising, but threat low: Analysts
Samantha Hutchinson
[Image: sam_hutchinson.png]
Property Writer
Ben Wilmot
[Image: ben_wilmot.png]
Commercial Property Editor
Sydney
[Image: 718838-f3af6e78-6a38-11e5-9bb9-94d25a90b8df.jpg]
Morgan Stanley analysts say that up to 60 per cent of Lend Lease apartment sales are at high risk of default.Source: Supplied
[b]The risk of buyers not settling their apartment purchases is rising, but analysts remain sanguine about the threat posed to Australia’s largest developers arguing stocks have been oversold.[/b]
In a detailed note from Morgan Stanley, analysts found that at worst, up to 60 per cent of Lend Lease’s apartment sales were at high risk of default, but they deny it poses a real threat to the group’s earnings.
Despite banks clamping down on investor loans and China tightening controls on outbound capital, Morgan Stanley analysts argue Lend Lease’s shares have been marked down too much with deposits on-hand providing an adequate buffer if settlements fall through.
“While we acknowledge that settlement risks are increasing, we believe that the levels of apartment defaults and apartment price falls implied by today’s share price suggest that Lend Lease has been heavily oversold,” Morgan Stanley analyst Jonathan Lee said.
At the end of two years of strong house price growth and off-the-plan apartment sales, analysts are bracing themselves for higher settlement risk, as a tighter lending environment internationally dampens the capacity of new apartment buyers to stump up on sales settling in the coming months.
The risk is expected to extend to all major apartment developers with a high number of settlements due in coming months, but the analysts have downplayed the potential impact on share prices, given that many residential stocks are trading with the likelihood of a default priced in.
“We believe the derating has been driven by the market concerns of an increase in market default rates, due firstly to a potential shrinking pool of funds available for investors as major banks try to limit investor loan growth … and a tightening of capital controls for funds trying to exit mainland China,” Mr Lee said.
The analysts have calculated that more than 21 per cent of Lend Lease’s earnings before tax in the next four years will come from apartment sales, of which investors make up 30 per cent, and offshore buyers about 75 per cent of this.
“This suggests that up to 60 per cent of all Lend Lease’s apartment sales could be considered as high-risk sales, which could in turn put close to $638m of apartment profits over the next four years at risk,” Mr Lee said.
But the likelihood of this eventuating is small, and the developer can still grow earnings even if the default rate climbs to 100 per cent.
“Assuming all buyers default and the apartments are sold for the original sale, Lend Lease’s margins would actually increase by the deposit price less agency fees,” the analyst said.
Further calculations show that the group could meet targeted margins on apartments of 15 to 20 per cent profit even if all the buyers default and all the apartments are sold for 10 per cent less than their original sale price.
“Lend Lease’s current share price implies that 80 per cent of all apartments sold default and apartments are resold at 30 per cent discount to their original price,” Mr Lee said.
Lend Lease argued the group had taken active steps to minimise the impact of default if a significant shock was likely to affect buyers’ capacity to settle.
“Historically, settlement risk has been low for Lend Lease’s apartments business. We closely monitor project performance, and we look at our level of pre-sales and explore avenues to de-risk where appropriate,” a spokesman said. We are expected to settle a number of apartments in Brisbane, Sydney and Melbourne in coming months and settlement risk remains low.”
- THE AUSTRALIAN
- OCTOBER 05, 2015 12:00AM
Samantha Hutchinson
[Image: sam_hutchinson.png]
Property Writer
Ben Wilmot
[Image: ben_wilmot.png]
Commercial Property Editor
Sydney
[Image: 718838-f3af6e78-6a38-11e5-9bb9-94d25a90b8df.jpg]
Morgan Stanley analysts say that up to 60 per cent of Lend Lease apartment sales are at high risk of default.Source: Supplied
[b]The risk of buyers not settling their apartment purchases is rising, but analysts remain sanguine about the threat posed to Australia’s largest developers arguing stocks have been oversold.[/b]
In a detailed note from Morgan Stanley, analysts found that at worst, up to 60 per cent of Lend Lease’s apartment sales were at high risk of default, but they deny it poses a real threat to the group’s earnings.
Despite banks clamping down on investor loans and China tightening controls on outbound capital, Morgan Stanley analysts argue Lend Lease’s shares have been marked down too much with deposits on-hand providing an adequate buffer if settlements fall through.
“While we acknowledge that settlement risks are increasing, we believe that the levels of apartment defaults and apartment price falls implied by today’s share price suggest that Lend Lease has been heavily oversold,” Morgan Stanley analyst Jonathan Lee said.
At the end of two years of strong house price growth and off-the-plan apartment sales, analysts are bracing themselves for higher settlement risk, as a tighter lending environment internationally dampens the capacity of new apartment buyers to stump up on sales settling in the coming months.
The risk is expected to extend to all major apartment developers with a high number of settlements due in coming months, but the analysts have downplayed the potential impact on share prices, given that many residential stocks are trading with the likelihood of a default priced in.
“We believe the derating has been driven by the market concerns of an increase in market default rates, due firstly to a potential shrinking pool of funds available for investors as major banks try to limit investor loan growth … and a tightening of capital controls for funds trying to exit mainland China,” Mr Lee said.
The analysts have calculated that more than 21 per cent of Lend Lease’s earnings before tax in the next four years will come from apartment sales, of which investors make up 30 per cent, and offshore buyers about 75 per cent of this.
“This suggests that up to 60 per cent of all Lend Lease’s apartment sales could be considered as high-risk sales, which could in turn put close to $638m of apartment profits over the next four years at risk,” Mr Lee said.
But the likelihood of this eventuating is small, and the developer can still grow earnings even if the default rate climbs to 100 per cent.
“Assuming all buyers default and the apartments are sold for the original sale, Lend Lease’s margins would actually increase by the deposit price less agency fees,” the analyst said.
Further calculations show that the group could meet targeted margins on apartments of 15 to 20 per cent profit even if all the buyers default and all the apartments are sold for 10 per cent less than their original sale price.
“Lend Lease’s current share price implies that 80 per cent of all apartments sold default and apartments are resold at 30 per cent discount to their original price,” Mr Lee said.
Lend Lease argued the group had taken active steps to minimise the impact of default if a significant shock was likely to affect buyers’ capacity to settle.
“Historically, settlement risk has been low for Lend Lease’s apartments business. We closely monitor project performance, and we look at our level of pre-sales and explore avenues to de-risk where appropriate,” a spokesman said. We are expected to settle a number of apartments in Brisbane, Sydney and Melbourne in coming months and settlement risk remains low.”