UPDATE 1-Australia's Stockland to slash dividend

(Adds details)

MELBOURNE, Dec 17 (Reuters) - Stockland Group (SGP.AX), Australia's second-largest real estate trust, plans to cut its annual payout by 27 percent and cut the value of its residential projects by 5 percent after a fall in property prices.

The firm also announced on Wednesday a review of its dividend policy to conserve cash. Currently, it pays shareholders all rental profits and 90 percent of profits made by the rest of the business, which includes property development and management.

"We recognise that market conditions in Australia are getting tougher and we are managing our business prudently, with a strong focus on capital management to ensure we come through the downturn in sound shape," Managing Director Matthew Quinn said in a statement.

The group said government handouts had helped spur sales at the cheap end of the housing market, but at the top end it said sentiment remained fragile and "value is impaired".

It said it would take an after-tax writedown of around A$105 million ($73 million) in in its first-half results, reflecting changes it would have to make to its top-end residential projects, weaker selling prices and lower site values.

While Stockland said its underlying profit was expected to be in line with its previous forecasts for a slight increase on last year to 46.7 cents a share, it said residential inventory writedowns in Britain and Australia and dilution from a recent A$300 million placement would cut earnings per share to 35 cents.

It estimated it would pay a distribution of 34 cents a share for the year to June 2009, down from 46.5 cents last year, based on its current payout policy.

Stockland, considered to have one of the strongest balance sheets in the property sector, said it had refinanced all debt due by June 2009, with about A$1.1 billion of debt headroom.

The group has been using its strong balance sheet to buy up stakes in stressed rivals such as GPT Group (GPT.AX), in which it bought a 12.7 stake last month, and retirement village owners FKP Property (FKP.AX) and Aevum Ltd (AVE.AX).

FKP this week extended a two-month exclusive period for Stockland, giving it more time to come up with a takeover proposal for the retirement villages.

Stockland said it had no current plan to increase its investment in Aevum, and was moving its stake in GPT off its balance sheet to improve its cash position.

"Stockland is happy with its current investment and its long-term strategy is currently under consideration," it said of the GPT investment. ($1=A$1.44) (Reporting by Sonali Paul, editing by Mark bendeich)