How Stockland is punting on a bit of Goodman Group magic
Stockland CEO Tarun Gupta outlined his strategy in November 2021. A new development deal with US-based Invesco is part of it. Photo: Renee Nowytarger

How Stockland is punting on a bit of Goodman Group magic

It’s Goodman Group first, daylight second, when it comes to Australia’s big listed property groups. Now, others are stepping up their game.

While Goodman has an unrivalled global portfolio of properties and capital partners, the copycats are replicating its model, which is the benchmark because it has made so much money for shareholders. We’ve seen clear moves from Stockland and Lendlease in the past two days to be more Goodman-like.

Stockland CEO Tarun Gupta outlined his strategy in November 2021. A new development deal with US-based Invesco is part of it.
Stockland CEO Tarun Gupta outlined his strategy in November 2021. A new development deal with US-based Invesco is part of it. Photo: Renee Nowytarger

Goodman’s model starts with strong development capability (first sheds, now data centres), adds third-party investors early and really sings as those developments are spun into Goodman-managed private capital partnerships. It crystallises development profits early on and liberates capital to be piled back into new developments.

From the equity market’s perspective, it reduces development risk and most importantly promises earnings growth. That is why Goodman shares have returned 26 per cent a year for the past decade; its yield is secondary to that growth. Tanarra Capital called it the “flywheel” business model when it turned up at Lendlease in 2022.

For other big property developers, whose shares return low-to-mid-single digits a year at best, following suit is a no-brainer. The evidence is there – the hard part is attracting that third-party capital on the right terms.

So, Stockland Group’s deal to set up a new land lease communities partnership with US bigwig Invesco Real Estate on Tuesday caught our eye. It looks like another attempt to take that Goodman model and apply it to one of Stockland’s sub-sectors.

Under the agreement, the pair plan to develop 1190 new homes across three land lease sites – typically retirement or over-55s villages – and generate $1.1 billion in development revenue, initially. The sites are in NSW and Queensland, with a potential fourth site, also in Queensland.

Stockland will own 50.1 per cent of the venture, while Invesco takes the rest. They’re calling it Stockland Land Lease Partnership 1.

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Stockland’s “The Gables” in western Sydney, which is part of the new land lease partnership.
Stockland’s “The Gables” in western Sydney, which is part of the new land lease partnership.

For Stockland, it is about getting the right mix of development risk and third-party investors, and recycling that development book into a higher return on equity business.

Stockland has done it a few times recently; its other capital partnerships include separate land lease spin-offs backed by Mitsubishi Estate Asia and Bangkok-listed Supalai, and MPark in Sydney’s north-west, which involves Canadian real estate group Ivanhoe Cambridge.

These deals show Stockland CEO Tarun Gupta’s strategy taking shape.

When Gupta took the reins in 2021, he outlined a strategy to reshape Stockland’s portfolio, accelerate its development pipeline, and scale those capital partnerships to grow the group’s funds under management and management income. The Invesco agreement ticks all three boxes.

It is also about trying to change what drives Stockland’s share price.

If you ask an investor, Stockland has been a proxy for Australia’s cyclical residential property market for years. As a result, its shares get knocked around by the interest rate outlook, household budgets and the economy.

Earlier this year, for example, it traded up to $4.80 on speculation the Reserve Bank of Australia would cut interest rates, and was back to $4.32 as those expectations moderated. It really is a punt on the housing market.

Gupta wants that share price to be about much more. He is trying to transform Stockland into a development triple-threat (residential, industrial and the land lease communities), and third-party capital manager across all three sub-sectors. It is Goodman-like in its verticals.

By following Goodman down the funds management path, it should (in theory) knock some of the volatility out of its earnings and take some of the punting out of its share price. Its land lease pipeline also looks big at 8800 homes at a time when the population is ageing and property prices are high.

Multiple reasons

Will it work? It has for others in the past decade. Goodman has its 26 per cent annual return for investors, while Charter Hall is up 17 per cent a year, and Centuria Capital, another that has made the most of the funds management model, has returned 13 per cent a year.

The ASX 200 real estate index has returned only 6.9 per cent (even after Goodman’s heavy lifting; it is the largest constituent). Stockland has returned 6.6 per cent.

Stockland isn’t the only one tinkering with its business model and following Goodman down its path.

Lendlease’s strategic shake-up on Monday has similar undertones; simplicity, third-party capital, and keeping development profits within the business. Lendlease announced plans to exit offshore construction and development, releasing $4.5 billion in capital.

The next bet is that Australia’s property field will split into two groups: the top developers and capital stewards in their patch (Goodman, Mirvac, Stockland), and the capital syndicators (Charter Hall, Centuria, HMC Capital).

The shifts are being driven by the two big forces in real estate: interest rates and capital markets. Interest rates are up and likely to be higher for longer, which makes it more expensive and harder to attract funds for development, while capital markets are much quieter, with fewer transactions and less ability to turn over portfolios.

As a result, the likes of Mirvac, Stockland and Lendlease, all property developers at heart, are rethinking their roles as stewards of third-party capital of scale, and doubling down on that. Market multiples imply that’s a good thing.

For Stockland, the icing on the cake could be if it followed industrial giant Goodman into data centres. Stockland has a decent industrial portfolio of its own and its mixed-use MPark development in Sydney’s north-west includes a data centre. Work started at MPark last year. Watch this space.