Mirvac Group (ASX: MRG) shares have been a standout in the real estate sector over the last 12 months. Can they continue to thump the ASX 200 (INDEXASX: XJO)?
Mirvac is a leading Australian property group with approximately $21 billion of assets under management. Operations include both commercial and residential projects, primarily based in Sydney and Melbourne, but also include Brisbane and Perth developments. Mirvac now has 47 years of experience since their establishment in 1972.
The Race To The Top
Mirvac shareholders have enjoyed a 26% rally over the past 12 months, with an 18.5% increase in just the last 3 months. Since releasing their half year report to shareholders in February, Mirvac shares have rocketed to an all-time high.
You can read the highlights of Mirvac’s half year report here.
To recap, operating profit after tax increased 26% and there was a positive cashflow of $167 million compared to a $20 million outflow in 1H18. This was all despite a struggling property market across the east coast of Australia.
So, how long can this rise continue?
The Risks
Mirvac is heavily invested in both Sydney and Melbourne and this is where the majority of their revenue comes from. If all the recent headlines about a failing property market are to be believed, Mirvac’s sales and margins could be in trouble.
While some experts have made claims that Melbourne and Sydney markets could drop 20% this year, this still seems like an extreme situation. Even so, Mirvac is definitely moving into uncertain times. The impact of the Banking Royal Commission has been tighter lending standards that have coincided with falling property prices.
The risk that Mirvac faces now are defaults on off-the-plan apartments or properties purchased in 2016 and 2017 during the height of the boom.
With some of these apartments approaching settlement deadlines, Mirvac is relying on buyers being able to source finance. While these buyers may have been able to borrow enough money in 2017, they may not have the same opportunities now with the banks tightening standards.
Over the next one or two years, there is a chance Mirvac could face increasing default rates and reduced profit. There is also the more obvious risk that falling property prices will result in lower returns on development projects.
My Take
While Mirvac has shown stable growth for several years, they are facing uncertain times with a share price that has never been higher. The prospects for the property market over the next 12 months are quite bleak in the eyes of most experts. This is one company I’ll be watching from the sidelines over the next year.
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
