However, in the revision that cut Stockland's price target to $4.08 from $4.20, UBS said it expected the picture to deteriorate from next year, with the compound annual growth rate of funds from operations between 2018 and 2021 dropping to 1 per cent from 4 per cent.

"Stockland are guiding to [about] 6500 lots in FY18 with margins of 17 per cent for the next 2-3 years and 15 per cent medium term," the research note said.

"Our forecasts assume lots decline to [about] 6,000 lots in FY21 and margins stay [above] 17 per cent which sees resi operating profit peaking in FY19 ($348m, slightly revised upwards) with declines the following years of 6 per cent in FY20 and 12 per cent in FY21".

An 8 per cent fall in residential volumes would cause funds from operations to be flat by FY21, the analysts said.

Carolyn Cummins. Commerical Property Editor. Retirement developments are gaining traction, boosted by the strong residential market, which is allowing investors to sell their homes to buy into the new projects. Stockland has commenced the $160 million redevelopment of its Cardinal Freeman Retirement Village at Ashfield in Sydney’s inner west (artist impression pictured). The project is the largest, single retirement village development underway in Australia. The redevelopment is expected to generate an incremental internal rate of return of more than 15 per cent. Stockland group executive and chief executive Retirement Living, Stephen Bull, said the project will incorporate medium density apartments to enable retirees to enjoy low-maintenance homes with a full range of amenities available in a highly sought-after location. According to Rider Levett Bucknall (RLB), the level of residential activity shows no sign of declining. Residential preconstruction sales continue to attract buyer interest. Existing properties continue to attract greater sales values resulting in an increase in the development of new sites suitable for multi-unit development. Managing director NSW for RLB, Bob Richardson, said the strong level of residential real estate activity was permitting developers to implement new opportunities for retirement living projects, particularly in the outer suburbs of Sydney, Central Coast and Hunter regions. ‘‘Allied to Retirement Living projects becoming viable, opportunities for Residential Aged Care Facilities as either new or refurbished facilities have increased,’’ Mr Richardson said. ‘‘These increased opportunities are prompting construction organisations to establish specialist divisions to service both Retirement Living and Residential Care facilities.’’ Stockland’s Cardinal Freeman Retirement Village is located less than 10 kilometres from the Sydney CBD. Stockland will build 240 new apartments, which will range in size from one to three bedrooms, with each including a car parking space. In addition, a state-of-the-art 133-bed Aged Care facility will be incorporated into the village to provide high-quality care to residents of all care needs. Stockland’s chief executive Mark Steinert has said the retirement sector was core for the group and would be expanded to cater for all residents through the added aged care assistance projects. The Cardinal Freeman redevelopment will take about seven years, and will be undertaken in three stages; the Care Precinct comprising the new Aged Care Facility and 101 apartments is scheduled for completion towards the end of 2015; the Village Green Precinct includes 40 apartments and the new community facilities, while the Victoria Precinct will comprise 99 new apartments and the restored heritage gardens adjacent to Glentworth House.

"We now forecast flat FFO growth from FY19 to FY21," they said.

"We have also revised down retirement living forecasts again as housing turnover is falling which impacts potential retirement living residents to sell their existing property to move into a Stockland village."

The analysts also pointed to Stockland's lending covenants - the most restrictive of any AREIT - as a curb limiting the company's ability to support its share price through a buyback.


"Stockland gearing when stated on a debt to total tangible assets is 23 per cent," they said. "However, after taking into account land creditors (payment of options not included in inventory) and cost to complete of provision, gearing increases to 35 per cent (Total liabilities / total tangible assets) which is the highest level in 4 years (which increased by $0.6b in 1H18 as a result of land acquisition on capital efficient terms)."

Mark Steinert CEO of Stockland...its shares fell 8¢ to $4.25 on Tuesday.

"This is important as Stockland's lending covenants are calculated on the leverage ratio of TL/TTA which has to be maintained below 45 per cent. This is more onerous than any other AREIT.

"It's also worth noting that SGP have turned off the DRP given current trading levels (raised c$120m per annum). In an expected period of heightened uncertainty in residential we'd anticipate SGP to reduce leverage rather than looking at instigating an on market buyback with any asset sale proceeds."

Stockland Highlands residential development at Cragieburn in the Northern Suburbs iof Melbourne. Erin Jonasson