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Global property giant Lendlease aims to generate most of its earnings from funds under management and investment operations, with demand for its high-end residential assets and the burgeoning build-to-rent properties underpinning its development business.
The construction business, which has felt the brunt of rising inflation and interest rates and supply chain issues, has experienced a recovery even as margins on projects remain tight.
Lendlease CEO Tony Lombardo said the group was on track to have $70 billion in funds under management by 2026, equal to about 60 per cent of overall earningsCredit: Jessica Hromas
For the full year, Lendlease reported a statutory loss of $232 million, which it had flagged in May. After the one-off items, which included a provision for retrospective UK government action on the flammable cladding of residential buildings, net profit was $257 million, down 7 per cent. Asset sales in the retirement business and US military housing and telco towers sectors also impacted the earnings.
Lendlease chief Tony Lombardo said the group was on track to have $70 billion in funds under management by 2026, equal to about 60 per cent of overall earnings with the development arm contributing the rest.
“We made significant progress during the year towards being investments-led and further simplifying the group,” he said.
Lombardo took over in 2021 and has focused on cost-cutting, which last month led to a 10 per cent reduction in its global workforce.
He told analysts on Monday that funds under management grew to $48.3 billion and major developments such as Queen Victoria Market in Melbourne and the upmarket One Circular Quay apartment tower in Sydney would provide solid earnings in the future.
The $5.84 billion ASX-listed Lendlease operates in three business units: investment, development and construction.
After the results, Lombardo said Lendlease would not build any more apartments for sale to third-party investors or external projects less than $150 million in value, with the focus firmly on boosting the build-to-rent segment, which has a $28 billion worth of projects in the pipeline globally.
“We expect a pick-up in sales for the residential business as there is more clarity on the direction of interest rates and inflation. But we are de-risking the business,” he said.
Winston Sammut, property manager for Euree Asset Management, said Lendlease expected a healthy improvement in earnings in 2024, benefitting from its low gearing, currently at 14.8 per cent, and a sound contribution from its development division.
“However, a number of provisions, being $74 million in the US from the 2021 sale of the Americas Telecommunication business and a $95 million additional provision in the UK detracted from the bottom line,” Sammut said.
The group’s return on earnings is forecast at the lower end of 8 to 10 per cent. Lendlease maintained its full-year distribution at 16¢ with the final payment of 11¢ due on August 18.
For diversified group GPT, despite the challenging conditions for the office segment, the retail segment recovered strongly, and the logistics business continued to benefit from robust demand.
Shoppers have returned to its malls, particularly Melbourne Central which was hard hit during pandemic lockdowns, and sales are up 26 per cent on the first half of 2022. New Asian-food focussed supermarkets, athleisure and cosmetics were the main drivers of sales.
In the December half, GPT’s funds from operations, being a more accurate measure for real estate investment trusts, was down 3 per cent to $316.7 million, due to a drag from higher financial costs and a 4 per cent decline in asset values.
Outgoing GPT chief Bob Johnston said the office sector remained challenging due to elevated levels of market vacancy, and the reduction in workspace requirements as a result of remote and hybrid working. GPT is selling its half share of the Australia Square Tower in Sydney.
“Office use is still in the mid-week time slot for most companies, but there is clearly a flight to quality, as businesses use both flexibility and their workplace to attract talent,” Johnston said.
The $8.04 billion ASX-listed GPT will pay an interim distribution of 12.5¢ on August 31.
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