Looking beyond a record year

Customer focus

In response, Frasers Property is engaging with its off-the-plan buyers far more than it has in the past. Regular communication, seminars and events keep buyers up to date on the construction of their property and aware of the latest in mortgage finance options.

This customer focus applies equally to foreign purchasers. Established teams based in Hong Kong, Shanghai and Singapore maintain regular contact to ensure the highest level of support and service to customers. These teams have been in place for many years.

Positive employment fundamentals underpin market resilience

Frasers Property has not curbed its long-term appetite and is looking to invest in new development opportunities, particularly projects that benefit from the current investment in transport infrastructure, or government partnerships with a proportion of community housing.

Mr Boyd does not believe that Australian housing is headed for a US or Irish style collapse.

“I don’t see the perfect storm scenario,” he says. “There will be impacts to demand but with the long-term fundamentals, and the stronger economy, there won’t be a more significant downturn,” he says.

“With the strong investment in infrastructure, people feel confident about employment and interest rates are unlikely to rise before 2020.

“And supply will turn down. We will see the approval numbers turn quite violently. Sydney still looks like it is not going into oversupply.”

Australian fundamentals strong in the region

The Chief Executive Officer of Frasers Property Australia, Rod Fehring, told analysts at the global real estate group’s annual results presentation in Singapore in November that the outlook for the residential sector was “subdued” with further house price declines expected in Sydney and Melbourne.

“Uncertainty around tax policy changes will further impact sentiment as a Federal election looms early in 2019,” Mr Fehring said.

“The effects of these cyclical changes will have an increasing impact from the second half of 2019 into 2020. However, our project portfolio will be characterised by project completions, leaving headroom for cautious re-investment as opportunities present themselves as the cycle plays out.”

For Frasers Property Australia, the 2018 financial year has actually been a year to capitalise on the strong market conditions of the past few years. Mr Boyd calls it a “year of delivery.”

It is also about positioning the business to ensure it continues to perform well in the context of more ‘normal’ trading conditions.

From Singapore, where Frasers Property’s global real estate operation is based, Australia appears “opportunity rich” with “strong risk-adjusted returns when compared to other international markets” says Mr Boyd.

For the full year ending September 30, Frasers Property Australia’s residential business completed and settled 3,040 apartments and land lots. With most of those properties being boom time, high margin products, profit, before interest and tax, jumped 42.5 per cent to a record $S145.4 million.

Settlement risks managed

For Mr Boyd, the big challenge for 2018 was settlement risk. The units were pre-sold in an era of relatively easy money but during development the banks tightened lending, the Chinese government restricted the outflow of capital, and the valuers became more conservative.

The question was whether buyers would settle their sales without the finance they thought they had.

He need not have worried. In general, he said, the settlement default rate has remained low, around 2 per cent.

In a small number of high density projects in Melbourne and Brisbane, higher foreign purchaser default rates have been experienced. However, given the quality of the product, Frasers Property has found a ready market for finished apartments.

Mr Boyd acknowledges that buyers are taking longer to settle, and that an increasing number are eventually settling with cash, without any mortgage.

As well as becoming more engaged with its off-the-plan buyers, Frasers Property has continued to work with valuers. In a falling market, bank valuations become critical, not just for the peace of mind of the buyers, but also in setting the limits on what financiers are prepared to lend.

“We are hearing some horror stories but our projects are holding up very well,” Mr Boyd says.

“We have always been pro-active with valuers; we hold valuer evenings to explain all the benefits of our projects. So when a valuer is appointed to one of our apartments they understand the product.”

Mr Boyd is less worried about settlement risk in the current market because the “customers buying in the last 12 months understand the finance conditions.”

“We now consider ourselves having very low settlement risk and our 2019 revenue is very well secured on the pre-sales numbers,” he says.

A tale of many different markets

The group expects to settle another 2,300 apartments and land lots in the 2019 financial year, which is 24 per cent less than in 2018.

“As these numbers suggest,” Mr Fehring told analysts, “the wave of strong sales activity through 2016 and 2017 will wash through our numbers in 2019 as construction is completed and settlements are finalised, delivering strong cash flow particularly in the first half of 2019.”

Frasers Property plans to release 2,200 new apartments and land lots for sale and pre-sale in 2019, which is actually 20 per cent above the 1,800 released in 2018.

Mr Boyd says the increase reflects not a rush to market, but a return to a normal level of releases after the 2018 number was constrained by planning and development delays.

While sales have tapered at projects like Tailor’s Walk in the Sydney suburb of Botany, they have remained strong at Ed.Square in Sydney’s south west and at Burwood Brickworks (pictured above), a middle ring infill site, in Melbourne.

The Ed.Square (pictured below) and Burwood Brickworks projects tell the story of what today’s buyers want. Both have good accessibility, with a new train station at Edmondson Park and strong existing connections for Burwood. Both will have brand new retail centres and offer a mix of housing including townhouses and apartments.

“Rail stations have become critical, especially in Sydney” says Mr Boyd. “The projects of choice have transport and retail right at their door.”

Outside Sydney and Melbourne, Mr Boyd does see “the front end of the interstate migration curve driving demand in South East Queensland” but little upside in Perth where the market is “still very tough.”

Innovative partnerships and mixed tenure development expertise are key

At September 30, Frasers Property had a residential pipeline of 15,300 potential apartments and land lots with a value of S$8.1 billion. It’s a pipeline it wants to maintain, even grow, for the opportunities ahead, despite the current market weakness.

Mr Fehring told analysts the company had maintained a “disciplined and selective approach to re-stocking.”

Frasers Property announced one site purchase during the year, of a 5.4 hectare holding at Carina in Brisbane’s inner south east, which is suitable for a masterplanned community of 185 land lots, terraces and townhouses.

“Several additional projects have been secured but remain undisclosed as they are subject to the satisfaction of contractual pre-conditions,” Mr Fehring said.

“We want to buy, but we want to buy the right projects,” Mr Boyd says. “We are seeing a few sites come back on the market. But you need to be diligent and patient.”

He warns that some site owners will be financially “underwater” because whilst apartment prices and end returns are falling, construction costs are still going up.

Beyond the traditional development site, Frasers Property is keen to partner with governments on new projects using government land and including some community housing.

The group, along with Mission Australia Housing, will develop the innovative $2 billion plus Ivanhoe Estate in Sydney’s Macquarie Park under the NSW Government’s Communities Plus program.

And in Sydney’s west, Frasers Property is working with Penrith City Council on the redevelopment of a near two-hectare council car park as part of the transformation of the Penrith CBD.

“You will see more Ivanhoes and Penriths,” says Mr Boyd. “We see ourselves as a valuable and experienced partner. Government wants quality outcomes at scale and this aligns with the Frasers Property capabilities, brand and values.”

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