Lendlease exposed to slower market amid pandemic

Nick Lenaghan|Mar 17, 2020

Developer and fund manager Lendlease could come under pressure as the coronavirus pandemic puts a brake on major commercial transactions, according to a Macquarie Wealth analysis.

The ASX-listed urban regeneration powerhouse has a global footprint of residential and commercial office tower developments and often sells down stakes in larger projects before they are finished.

That profit recycling process could be interrupted by the ramifications of the COVID-19 outbreak, as institutional investors move more cautiously during uncertain times.

“These profits typically rely on third parties acquiring a stake in a development asset (or investment asset),” Macquarie analysts warned in a client note.

“This can provide a significant cash injection if the asset is already under development as well as a source of profit if sold above book value (cash for the 3rd parties share and revaluations on Lendlease’s remaining stake).

“During economic instability, real estate transaction volumes typically moderate and during the GFC transaction volumes declined 60 per cent.”

Four commercial property projects – in Melbourne, Sydney, London and Milan – were identified by Macquarie. The main risk to Lendlease, led by Steve McCann, from disruption in the commercial market would be that its gearing rises to the upper limit of its target.

But another potential challenge for Lendlease amid the repercussions of COVID-19 is the risk to global supply chains, with a large amount of building materials sourced from China.

In Macquarie’s view that risk is somewhat diminished as China slowly ramps up production and as a result “the headwinds here may not be as severe as what they could have been”.

“The use of sub-contractors’ also aids in limiting the impacts,” the analysts said. “A further risk is the shut down of projects. This would have the impact of lowering construction revenue and a greater profit impact given relatively fixed overheads in the business.”

Amid more stockmarket volatility on Monday, Lendlease had fallen around 12 per cent by the afternoon. Macquarie has nevertheless retained its “outperform” rating on the stock.

Already this month, JPMorgan analysts have separately downgraded property fund manager Charter Hall on fears the outbreak will put a dampener on commercial real estate deals through travel restrictions and increase uncertainty over asset values.

Goldman Sachs downgraded its recommendation for global logistics player Goodman Group from “neutral” to “sell” due to concerns the coronavirus will disrupt its construction activities in Asia.

Cromwell Property Group’s chief executive, Paul Weightman, said the spreading coronavirus is disrupting business activity, as travel plans were torn up, personnel stranded and transactions put on hold, a worrisome sign for fund managers.