Mirvac signalling risks to the property sector

Hi guys,

This article in the SMH today has an interesting little side-note from Mirvac:

http://business.smh.com.au/mirvac-affirms-guidance-after-86-profit-boost/20080212-1rou.html

SMH Article said:

In the slide presentation of its results, Mirvac also warned that the ongoing global credit crunch would have implications in the real estate sector.

In property, there would be a move "back to basics", it said, with high leverage coupled with financial engineering unsustainable.

But market conditions would be "advantageous" for well capitalised companies, it said.

The company has reduced its gearing to 29.8 per cent.

Click to expand...

So, what's everyone's take on that bolded comment then? Sounds ominous. By "back to basics" I think they mean a return to yield as the primary driver of property value and not inflated prices predicated on growth. They seem to be signalling more distressed sales and a drop in real estate prices. This would then prove "advantageous" for the likes of Mirvac who are on a 29.8% LVR and who can absorb higher rates and pick up bargains as they emerge in the coming years...

Suddenly leverage really does seem to be a double-edged sword. Where's AlexLee? This must be music to your ears!!

Cheers,
Michael.

Music to my ears also......Mirvac are pretty conservative and well run. So for them to say this is a worry if you are overgeared and do not have cashflow to service debt.....

I have also been reducing debt on properties which are not returning value. A 30% percent gearing is near text book for conservative debt levels.

So yield in back in VOGUE now is it?? Gee....where are those high yield does not produce high capital growth people now!

Thanks for sharing....I await the next week months for opportunities to present.

MichaelWhyte said:

Hi guys,

This article in the SMH today has an interesting little side-note from Mirvac:

http://business.smh.com.au/mirvac-affirms-guidance-after-86-profit-boost/20080212-1rou.html

So, what's everyone's take on that bolded comment then? Sounds ominous. By "back to basics" I think they mean a return to yield as the primary driver of property value and not inflated prices predicated on growth. They seem to be signalling more distressed sales and a drop in real estate prices. This would then prove "advantageous" for the likes of Mirvac who are on a 29.8% LVR and who can absorb higher rates and pick up bargains as they emerge in the coming years...

Suddenly leverage really does seem to be a double-edged sword. Where's AlexLee? This must be music to your ears!!

Cheers,
Michael.

Click to expand...

I rekon Mirvac are just saying that because it suits the people who own properties in their developments!!

really? is it going to get _that_ bad for people?

I'm just not convinced yet. I'm a complete beginner, and have no real idea why .. but I really think price stagnation is far more likely than sharp falls. Of course, maybe I think that because we only just bought our tiny, cheap PPOR late last year and can't face the idea of "losing" money on that deal.

I just think the next few years will be a good chance to buy in at consistent prices ahead of the market approaching liftoff again later. Not so much a time to avoid buying at all.

Regarding the orinal comment I think they are talking more about how companies structure themselves. Some property companies developed complex structures and high gearing ratios. There was little transparency as to what assets backed what loans. Lenders accepted this while credit was cheap and easy. Comapnies grew rapidly.

Now lenders want to know what assest back there loans and wond accept big LVRs. Companies who were thought of as being tooi conservative a while ago (eg Stockland) are now thought of as being smart and well positioned to pick up bargins and grow. Companies who grew aggresively through debt are now in trouble (eg Centro). I don't know much about Mirvac so I cant comment there.

I don't interpret that as "yield matters, forget capital growth". However, the only reason to accept low yield is if you except future strong capital growth. I dont expect capital growth to be strong in the near future so in that sense there will also be a return to yield.

I think they are referring to the 'traditional" lending practices returning;

20% deposits,
correct servicability,
full-doc loans,
lower LVR's.

The days of the 95% NoDocs are numbered, or at best, will be harder to obtain and a lot more expensive in terms of fees and interest rates.

This is already happening here, so it is not news.

It has become very difficult to get exotic loans apparently, with many of them being taken off the shelves altogether.

Same will happen back in Aus I'm sure (it already is I believe), so you'll see considerably less qualified buyers around before long.

Good times ahead for those who are cashed up with low LVR's.

Hi,

I agree with LA Aussie in that there has to be a more towards more traditional lending practices. The idea of lending someone 106% to buy property when they have no money of their own is risky as it is. Even back home in Singapore, they have only relaxed to 90%LVR (I believe this is still correct.)

The US situation is often a good indicator of what Aust might go through.

Basically, time to store up that cash and wait for things to slow down before moving in to pick up the bargains. There is always a 'deal of the week' just around the weekend!

Cheers
Daniel Lee