Real estate companies feel the pain

Real estate companies have seen their industry hit hard by the downturn, with major sales in the commercial and industrial sectors all but disappearing.

But companies well placed to take advantage of demand from first home owners and a recovery in the wider property over the next 12 months, will continue to perform well, the latest SmartCompany Dun & Bradstreet Industry Growth List for the real estate sector shows.

The top 30 companies on the list range in size, and results are just as mixed. The highest growth rate on the list is just 38% with revenue of $5.8 million, with Queensland-based Investa Asset Management coming in at the bottom with a massive 138% decline.

And while the real estate industry has performed better than expected over the past year, especially with the Government’s increase to the first home owners grant, the decline was too much for many firms. The average growth rate of the 30 companies on the list was a disappointing -15%, while average revenue came in at $344 million.

An industry in decline

The residential property market shocked analysts this year, with the first home owners grant propping up demand. But the commercial and industrial sectors haven’t had so much luck.

DTZ research director David Green-Morgan says 2009 was a “pretty disappointing” year for commercial property, impacted by plummeting consumer confidence.

“I suspect most companies are today smaller than they were on 1 January 2009, either in the value of the assets they hold or listed stock. There have been a few assets traded this year, but nothing substantial at all. I believe the biggest deal was Stockland’s deal with GPT earlier this year, but that was towards the beginning of the year.”

However, Green-Morgan says one of the most prominent trends over the past year has been the number of companies raising new capital.

“What we’ve seen in both the listed and unlisted space is a huge amount of new capital being raised and the dilution of existing investors’ stock. And while if you look at it from their view this year didn’t look good at all, I think they’re much more confident with hindsight.”

“You have investors who may have had their stock reduced, but they at least have their companies still around, and haven’t had to write off their investments totally. That would probably be the biggest trend in the second half of the year, seeing companies raising more capital and investors’ confidence raising.”

While most of this capital is likely to be given back to investors, Green-Morgan says, a number of it should be diverted into the purchase of new assets in 2010 – which could trigger a wave of investor confidence.

“We’ll see some portfolio readjusting next year, with companies getting rid of lower and secondary assets. Many companies are looking at these secondary assets and thinking it’s not worth it, which we might find will drive some rental growth in the short-term.”

“Confidence is such a huge component about everything. I think people are 50 times more confident now than they were 12 months ago, and as long as the private components of the economy are growing, hopefully we’ll see some more growth in 2010.”

“I don’t think we’ll see the type of returns we saw in 2006-07, where things got completely out of control, but if we have an average year like 2002-03 with average rental growth, I think most people would be satisfied.”

Devine looks to the recovery

One larger company impacted by the downturn was Devine, coming in at 26th on the list. The company predominantly focuses on offering house and land packages to first home owners, but its commercial development and apartment divisions have taken a hit.

The company’s revenue fell from $577 million during 2007-08 to $440 million during 2008-09 – a declining rate of 23.73%.

National general manager Luke Hartman says the company has seen substantial demand in its residential house and land packages business due to the extended first home owners grant.

“The house and land divisions are completely flying and are very, very strong. Due to the lack of supply of land, and obviously the first home owners grant, we’ve been at the forefront of the market and have been able to take advantage of that growth.”

“We were very fortunate to be in a position where we had land permits in place, had sites under construction and funded and were able to take advantage of that market. Although the banks had been difficult we had been negotiating with them and were in a place to leverage our relationships with them.”

But its commercial and apartment divisions have seen a large drop in demand, while Hartman says dealing with the banks has become harder than ever.

“There have been challenging environments due to financial constraints, and it’s definitely the biggest challenge facing the industry. The second is the availability of being able to get into sites in the market through approvals in local councils.”

“Of course, the third is the shortage of land ready for development. And that’s what’s going to continue to drive up prices, along with the banks which need to come out and lend at reasonable ratios again. They need to free up the debt market, and until that happens you’re going to see upwards pressure on prices.”

As for affordability issues, Hartman says there is definitely upward pressure on prices, but the company felt it could advertise cheaper prices in order to take advantage of the demand.

“We’ve probably got some of the cheapest land in Australia, and if they can’t afford a Devine house and land package then they’re probably not in the market to buy.”

Despite higher prices, Hartman says the outlook for the industry is positive, and expects demand in the commercial and industrial sectors to increase over the next year.

“Our feel is that even with the continuous lack of supply being produced, investors will continue to come into the market. And when you take into account the market dynamics of interest rates, they have surely risen and that’s a negative, but they’re very low historically and we’re confident about the future.”

Agents ride out the slump

Real estate agents catering to first home owners have managed to dodge the worst of the downturn, but several other property firms have done just as well.

Herron Todd White came in third on the list, recording 19.7% growth in revenue to $68 million during 2008-09. Chief executive Brendon Hulcombe says the company was well placed before the downturn as it focuses on valuation of properties rather than sales.

“We are predominantly engaged in property advice and valuation of residential, commercial, retail and rural property. Our major clients are the big four banks, and from that stems relationships with property developers, investors and a wider range of players. We’re essentially a consultancy group.”

While business has remained strong, Hulcombe says the company needed to take advantage of a trend within the industry of consolidating younger, smaller firms into their own to remain competitive.

He says this allowed the company to offload some resources and responsibilities, in favour of concentrating on its core property valuations service.

“Yes, we’ve been quite active in the mergers and acquisitions, predominantly to overcome some of the technology pressures we’ve had. We’re going to continually invest in some consolidation, and perhaps sharing some back-office resources with other valuation and property advisory firms. This has been a definite trend in the industry.”

But the increased demand has its setbacks. Hulcombe says the company has struggled to keep up with the amount of new work.

“We’ve been busy, and have really been employing more than we thought we’d be. That having been said, we wish would still put on another 10% of the workforce and that’s something we could change over the next year.”

As for an outlook for the rest of the year, Hulcombe says he was pleasantly surprised by 2009 and expects a similar performance over the next 12 months.

“I think most of our evaluators started 2009 with a reasonably pessimistic outlook, and most of them would be surprised now. We’ll just keep the business fundamentals going, and we’re going to keep an eye out for interesting mergers and acquisitions.”