Lendlease reveals tougher outlook as inflation and rates bite

Lendlease chief executive Tony Lombardo at Barangaroo in Sydney. Picture: John Feder/The Australian.

Global developer Lendlease has been sold down after it warned that returns on its operations will come in at the lower end of expectations this financial year.

Lendlease shares were down 5.4 per cent to $8.12 in early trade on Thursday even though it is confident that it will hit targets in 2024 as global economies pick up and it puts a new capital efficient business model in place.

The company said returns on its investments and developments would come in at the lower end of guidance and construction would deliver a margin of close to 1.5 per cent as it faces supply chain uncertainties.

“We see more challenging conditions with an alleviation after 18 months,” Lendlease chief executive Tony Lombardo said.

He said that the company was shifting to a more capital efficient way of operating and said it would look to bring in a partner into its land estates business. He said the company would look at that move “over the next 24 months”.

It will also work to bring in partners earlier on new projects, as it did when it bought the One Circular Quay site in Sydney from Chinese investment house AWH for $850m.

The company flagged that it would co-invest more as it set up new funds, which will impact returns before they are stabilised and it can lower its positions.

Lendlease said that investors were taking longer to commit to new funds as they dealt with higher inflation and interest rates and developments were also taking longer to complete. It also flagged that capitalisation rates – a measure of property values – were pushing out, which makes development tougher.

The company was separately hit by settlement and planning delays unrelated to harder macroeconomic conditions.

At a briefing analysts quizzed the company on how it was allocating capital with Mr Lombardo saying it was striving towards a more efficient model in which would run a $70bn funds empire – a big jump from the present $44bn – and having $7bn co-invested.

Holding more investments could make the famed developer eligible to become a real estate investment trust as its passive earnings grow but Mr Lombardo said the company was not focused on such a shift.

Lendlease has been sold off on concerns about its ability to turn around earnings but Mr Lombardo remains optimistic that the company can hit its target of developing $8bn of projects annually by 2024.

It has a huge pipeline focused on 15 global gateway cities. All up it has close to $42bn of master planned projects, with about $8bn of office projects, $10bn of luxury apartments, $8bn build to rent units and $15bn of land estates.

The company is switching more into funds and investments and has launched new vehicles including life sciences and innovation partnerships, bought a London skyscraper for a NSW-based fund, and set up opportunistic funds.

It is also forming vehicles for build to rent units and offices. After its success in offshore markets, the company flagged that it would look to introduce build to rent in Brisbane and also at Melbourne Quarter in the Victorian capital.

But investors are sceptical about Lendlease’s ability to pull off so many complex projects across different markets at a time when the global economy is slowing and have also urged the company to further simplify its business.