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Housing boom lifts earnings for REITs

houses and more houses Photo: Glenn HuntThe current reporting season has reached the halfway mark for the real estate investment trusts and as predicted, residential developments are the shining beacon.

Mirvac is one of the nation’s biggest home developers and has said the division is one of its main profit generators.

According to Citi analysts, Mirvac offers a compelling investment opportunity with a combination of upside risk to earnings and an undemanding valuation.

Mirvac chief executive Susan Lloyd-Hurwitz said while housing is buoyant, the double-digit price growth in NSW is unsustainable. But Citi analysts said the 2016 financial year earning’s guidance of 3  to 5.7per cent strikes them as conservative. “Development earnings will have a heavy skew to the second half, leaving room for doubt at the first half results. However, we think margins on projects settling in the second will be above average, and this represents upside risk,” the Citi analysts said. “Further, visibility on those development earnings is good, with 67per cent of 2016 financial year development earnings before interest and tax and 57per cent of 2017 financial year development EBIT has already been secured.”

The brokers added that Mirvac’s outlook commentary suggests ongoing positive conditions for residential markets, albeit  they expect the Sydney housing market’s rate of growth will moderate.

“This still looks like a favourable backdrop for fellow residential developer Stockland. The other stock with significant implications from the Mirvac Group result is Investa Office.

“Mirvac has confirmed that they are in exclusive due diligence to purchase the Investa management platform. While no deal has been agreed to, a sale of management rights to Mirvac could potentially see changes in the style of management and/or direction of Investa office.”

CLSA’s analysts said Mirvac’s residential business was the standout in this result, with record contracts on hand providing strong visibility of earnings. “However, despite hitting the top end of its guidance, dilutive asset sales and increased sales and marketing costs associated with an 80per cent increase in lots released dragged down the result,” the analysts at CLSA said.

“We expect Mirvac to tighten guidance towards the top end at first half of 2016 and reiterate a buy recommendation.”

Goodman Group was another beneficiary of the housing boom, selling $1.1 billion of land to residential developers in the year to June 30. UBS said they remain supportive of the business model.

GPT, Stockland, Federation, Charter Hall and Scentre are to report their results in the coming week.

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