Event Core
On 03 February 2022, the Australian Bureau of Statistics (ABS) released the December 2021 figures for the value of buildings approved and the number of dwelling units. The total dwellings approved surged by 8.2% MoM, seasonally adjusted. The units of private sector houses slipped by 1.8% MoM, while private sector dwellings (excl. houses) advanced by 27.5%. The total value of non-residential building approved shrunk by 16.3%.
Improved Macro Prospects
Total Capital Expenditure: In September 2021 quarter, the total private new capital expenditure slipped by 2.2% sequentially but surged by 12.9% on a PcP basis. Subsequently, capital expenditure for buildings and structures slipped marginally by 0.2% QoQ but advanced by 9.0% PcP. Despite short-term retracement, the capex remains at historically elevated levels.
Figure 1: Quarterly Trend of Private New Capital Expenditure
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Construction Work Done: In the September 2021 quarter, the total work done slipped marginally by 0.3% to $53.93 billion and building work dipped by 0.9% to $30.44 billion, owing to lockdowns and mobility restrictions. Despite the short-term downturn, the construction work remains at historically elevated levels with total construction value up by 3.5%, building construction value up by 3.2%, and residential construction value up by 7.0%, on the PcP scale.
Major Updates on Dwelling Approvals
Private Sector House: The approvals for private sector houses remained subdued, dipping 1.8% in December 2022, following a 1.6% decrease in November. The series has plunged by 31.5% since the peak of April 2021. While approvals have deviated from all-time highs, the series maintained historically elevated levels, with December 2022 results higher by 20.5% from pre-COVID levels (December 2019).
Value of Buildings: The value of total building approved slipped by 2.1% in December 2022, adjusted seasonally. The decline was primarily driven by a 16.3% downshift in a non-residential building approved, following a 27.8% uptick in November 2022. However, the value of total residential building advanced by 7.8%, driven by an 8.3% increase in new residential building value and a 5.2% increase in the alterations and additions value.
Figure 2: Approval of Dwelling Units by Building Type
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Fundamental movements across Australia: The number of dwellings approved surged in New South Wales (NSW) by +32.1%, owing to an increase in dwellings excluding houses, and in Victoria by +2.5%. Dwelling approvals slipped in Queensland by -14.8%, Western Australia by -7.7%, Tasmania by -7.4%, and South Australia by -0.3% on seasonally adjusted terms.
Key Risks and Challenges
In the September 2021 quarter, household spending dipped by 4.8%. The household saving ratio surged substantially to 19.8% from 11.8%, resulting in lower disposable income for realty investments. Gross value added by construction activities for the September 2021 quarter dipped by 1.1% sequentially, mainly due to a 1.7% fall in building construction. In September 2021 quarter, the Residential property prices index increased by 5.0% QoQ or 21.7% PcP, raising affordability concerns. The gradual unwinding of HomeBuilder Grants may culminate in a short-term decline in housing loan commitments. Interest rates sustain at low levels while investors’ risk appetite is advancing; hence, some asset pricing, especially real estate, may seem overvalued.
Figure 3: Key Risks and Challenges
Source: Analysis by Kalkine Group
Outlook
Favourable Capital Expenditure Estimates: For FY22, the ABS estimates $138.6 billion total new private capital expenditure, revised upwards by 8.7%, and $78.6 billion capital expenditure in Buildings & Structures, revised upwards by 5.8% from the previous estimate.
First Home Loan Deposit Scheme (FHLDS): The FHLDS is considered a long-term program as per the National Housing Finance and Investment Corporation (NHFIC). The NHFIC reported that FHLDS and New Home Guarantee (NHG) assisted 1 out of 10 aggregate first home buyers.
Increasing Liquidity Cap: On 16 December 2021, the joint announcement of Hon Michael Sukkar MP and Hon Scott Morrison MP towards increasing NHFIC’s liability cap shall be additional government support to deliver affordable housing.
Low-Interest Rate Environment: Since November 2021, the Interest rates for outstanding housing loans stood at 2.98% (down from 3.00% in October 2021), and for new housing, loans stood at 2.59% (down from 2.63% in October 2021).
Increased Mortgage Lending Activities: On Australian books of Authorised Deposit-Taking Institutions (ADIs), investment housing lending advanced by $3.9 billion or 0.6%, owing to robust borrower demand amid low mortgage interest rates.
(1) Ingenia Communities Group (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.21 Billion, Annual Dividend Yield: 1.94%)
New Homes Demand and Domestic Travel Supporting Company Fundamentals: Ingenia Communities Group (ASX: INA) owns, operates, and develops a lifestyle and holiday communities’ portfolio across urban and coastal markets in Australia. In FY21, the company registered $295.6 million in revenue, an uptick of 21% and $77.2 million in underlying profit, which was 31% YoY. The favourable top-line performance was primarily driven by increased rental sites, higher new home settlements, and robust performance from holiday communities.
Despite containment challenges from lockdowns, the company clocked a record of 380 new home settlements across the development project portfolio, up by 17% relative to FY20. Moreover, ten new homes were settled in INA’s funds’ operations. Operating cash flow clocked $137.6 million, substantially up by 105% from the FY20 level.
Business Update: On 3 February 2022, INA announced the expansion of lifestyle business via the acquisition of Oakland Village at a purchase orice of $8.5 million – adding 140 approved and build ready home development sites and seven completed homes to the portfolio, and a partially developed community centre.
Outlook: Despite the short-term challenges from limiting travel and potential uncertainty around construction activity, the long-term demand for domestic travel and affordable senior housing support growth. The rent stability from INA’s residential communities and responsiveness at holiday parks support new home demand and domestic travel.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
INA Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of INA went down by ~12.621%. The stock made a 52-weeks’ low and high of $4.710 and $6.999, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at some discount compared to its peer’s EV/Sales multiple averages, considering travel restrictions and potential risks in construction activities. For valuation purposes, peers like Stockland Corporation Ltd (ASX: SGP), Charter Hall Retail REIT (ASX: CQR), Aspen Group Ltd (ASX: AZP), and others have been considered. Given the improved fundamentals, rising new home demand, favourable movements in domestic travel, current trading levels, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the current market price of $5.380, as of 07 February 2022, at 12:58 PM (GMT+10), Sydney, Eastern Australia.
(2) Dexus Industria REIT (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.03 billion, Annual Dividend Yield: 5.35%)
Improved Fund Flow and High Collection Rate Harnessing Portfolio Growth: Dexus Industria REIT (ASX: DXI) is an Australian Real Estate Investment Trust (AREIT) which owns and operates a workspace portfolio of 90 industrial & business park properties, valued at $1.6 billion. In FY21, Funds from operations (FFO) surged by 12% and clocked $41.2 million. Net property income increased by 10.9% and clocked $49.9 million, bolstered by 8.7% growth at Brisbane Technology Park (BTP). The resilience of the occupier base was well reflected in DXI’s rent collection performance, registering 99.9% collection of contracted gross rent.
Gearing stood at 31.6%, falling at the lower end of the 30% - 40% target range. The $182 million worth of accretive acquisition was funded by circa $300 million debt facilities and a $55.4 million equity raise. The weighted average cost of debt stood at 2.65% at an interest coverage of 7.2x, one of the highest in the AREIT sector. Net tangible assets inclined by 38 cents per share (cps) to $3.20, driven by a fair value adjustment of $81.7 million.
Outlook: DXI is well positioned, with an average cap rate of 5.78% of its carbon-neutral portfolio and circa 3% fixed average annual rental increase with weighted average lease expiry tenure of 5.4 years. DXI’s real estate management platform, combined with the existing management team, has delivered the most significant future growth opportunities and asset management. FY22 guidance is set at FFO of 19.3 cps and dividend of 17.3 cps.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
DXI Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of DXI went down by ~6.140%. The stock made a 52-weeks’ low and high of $2.745 and $3.795, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peer’s EV/Sales multiple averages, considering the increased FFO position rent roll underpinning by government, national, multi-national, and listed companies. For valuation purposes, peers like BWP Trust (ASX: BWP), Goodman Group (ASX: GMG), Centuria Industrial Reit (ASX: CIP), and others have been considered. Given the improved fundamentals, highest coverage ratio in the AREIT sector, improved net property income, current trading levels, and upside indicated by valuation, we give a ‘Buy’ rating on the stock at the current market price of $3.170, as of 07 February 2022, at 12:11 PM (GMT+10), Sydney, Eastern Australia.
(3) Cromwell Property Group (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.23 billion, Annual Dividend Yield: 7.60%)
Tag Line: Cromwell Property Group (ASX: CMW) is a real estate investment and management firm with a property portfolio in Australia and AUM in New Zealand, Australia, and Europe. In FY21, CMW reported $11.9 billion in AUM. The firm’s statutory profits stood at $308.2 million, up by 73.5% YoY, primarily due to a surge in fair value gains on investment properties. Underlying operating profits stood at $192.2 million, down by 13.1% YoY. Portfolio value inclined by 5% and clocked $3.9 billion at a weighted average capitalization rate (WACR) of 5.5% and portfolio occupancy of 95.1%. Excluding Northpoint Tower, operating profits of the period inclined by 1.4% as rent collection remained resilient against COVID-19 impact.
Property investment held over 80% of profit before non-allocated items and stood at $193.6 million, marginally down by 1.3% YoY. Profits from fund and asset management stood at $41.7 million, critically down by 44% YoY, owing to a reduction in performance fees and transactional activity under COVID-19 circumstances. However, liquidity remains robust with $676 million, including a cash balance of $142 million and an undrawn facility.
Outlook: CMW seeks to maximise NOI and minimise vacancy rates in the core Australian portfolio to drive growth in dividend payout. The development pipeline includes the complete assessment of 19 projects (Stage 1).
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
CMW Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of CMW went down by ~3.429%. The stock made a 52-weeks’ low and high of $0.785 and $0.955, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). Compared to its peer’s EV/Sales multiple averages, the company can trade at some discount, considering reduced performance fees and transactional activities. For valuation purposes, peers like GPT Group (ASX: GPT), Stockland Corporation Ltd (ASX: SGP), Charter Hall Retail REIT (ASX: CQR) have been considered. Given the favourable fundamentals, increased portfolio value, focus on minimising vacancy rates, current trading levels, and upside indicated by valuation, we give a ‘Hold’ rating on the stock at the closing market price of $0.845, down by ~1.170% as of 07 February 2022.
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decisions should be made depending on investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock of the Target Price mentioned as per the Valuation has been achieved and subject to factors discussed above.
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