Mirvac shrugs off house price slide with 27pc profit jump

Mirvac's major office segment has posted a surprise $290 million profit result for the first half of fiscal 2019, up 27 per cent on the same period in 2018.

The property developer and manager's office portfolio accounts for almost 50 per cent of its balance sheet assets. Better-than-expected growth in office rents – supported by supply shortages in Sydney and Melbourne – contributed to a 7 per cent fair value estimate increase by Morningstar equity analyst Tony Sherlock.

In lifting his FVE to $2.25, from $2.10, Sherlock highlighted sustained low vacancy rates in the Sydney office market and slightly raised profit expectations for Mirvac's pipeline of commercial office and industrial developments.

At 10.45am on Friday, Mirvac was up 0.6 per cent, trading at $2.56.

"We like the business strategy laid down by CEO, Susan Lloyd-Hurwitz, to focus capital on the larger Australian east coast cities," Sherlock says.

 Location, location location: Mirvac's residential strategy focuses on amenity and transport

Lloyd-Hurwitz believes its residential development strategy concentrated on areas "close to amenity and transport" will continue to outperform the broader market. 

"We agree the larger economic hubs benefit from superior population growth and hence a deeper pool of tenant demand. Overall, we believe this, combined with a focus on newer high amenity premises, will result in superior long-term occupancy and hence lower-risk cash flows," Sherlock says.

"We were particularly pleased to hear Mirvac continues to stand on the sidelines and wait for further price declines before acquiring more residential land sites. This makes sense, as dwelling prices are still high relative to incomes."

The fall in Australian housing approvals is a short-term negative but Sherlock sees an eventual upside.

"This will accentuate the housing shortage, making it easier for Mirvac to market and sell apartments and land in outer years.

"We think Mirvac’s strategy on focusing on the major cities of Melbourne, Sydney and Brisbane and apparent discipline in acquiring sites support long-term shareholder value creation," he says.

However, Sherlock also notes the potential negative impact of a contraction in the Australian economy, which would reduce demand for office space and weigh on residential values.

"It would seem the investment community generally is ascribing too much weight to the current extremely buoyant economic conditions," Sherlock says, which partly explains why the stock is currently trading at 10-year highs of about $2.55 and above Morningstar's fair value.