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Morningstar | Softening Residential to Impact Abacus in Multiple Ways. FVE Falls to AUD 3.55

The Australian residential market has deteriorated much faster than expected with prices down 10% in Sydney over the past year. Residential turnover is also down materially as the sales cycle elongates. The lower volumes appear to be predominantly due to a significant tightening in bank lending criteria, a result of the Banking Royal Commission. Other negatives for volumes are tightened macro prudential controls, increased stamp duties for overseas investors, and tightened capital controls, particularly in China. Further, as prices have started to fall, prospective buyers--especially first home buyers--are likely to defer buying until they gain comfort house prices have stabilised. Lower dwelling prices crimp developers' profit margins. The lower volumes have a similar effect as the longer sales cycle means the holding costs on each site increase, weighing on margins. Following revisions to our forecasts, our fair value estimate declines 5.5% to AUD 3.55, with no-moat Abacus broadly fairly valued, currently trading at AUD 3.40.

Reflecting the faster than expected slow-down in the Australian market, and Sydney in particular, we’ve trimmed expected net proceeds from Abacus’s divestment of its land and apartment sites. We also see the storage business being impacted by the sharp reduction in the housing turnover as the housing market is a major driver of storage demands. Residents store furniture when they put their dwelling on the market for inspections and also store their possessions when moving between residences. We see the lower transaction volumes as reducing occupancy and also the rate at which landlords can raise rates. Self-storage rents are algorithmically determined, and dynamically adjust to demand. This means they are likely to be sensitive to small changes in occupancy and demand. Accordingly, we’ve trimmed the self-storage projected annual rent growth from 4% to 2% for the four years to June 2022; thereafter we forecast annual rent growth of 2.5%.