I. Sector Landscape

Australia’s real estate sector holds a strong base of the architectural portfolio with massive structures and iconic sites. As a result, Gross Value Added (GVA) growth of rental, hiring and real estate services bulged by 2.7% CAGR (1990 – 2020). Foreign direct investment in Australia clocked $1.03 trillion in 2020, wherein the real estate sector contributed 11.7% and stood at $120.0 billion. For FY20, the total GVA contribution of rental, hiring and real estate services clocked 2.9% of $1,808 billion.

Building Approvals Stay Afloat

Update on Number of Dwellings: For October 2021, the seasonally adjusted count of dwellings approved slipped by 12.9%, following a 3.9% deacceleration witnessed in September 2021; however, the count remained above pre-COVID levels. The decline was primarily driven by a significant 37.5% fall in approvals for private sector dwellings (excluding houses).

Approvals for Private Sector Houses: The private sector houses stabilised by 4.3% in October 2021, following a fall of 14.8% in September 2021. The statistical series has been at historically elevated levels for the past year, primarily attributed to government stimulus and low-interest record rates. As a result, the October 2021 results remains 34.3% above the pre-COVID levels (October 2019), despite the modest shortfall in recent months.

Figure 1: Dwellings Approved for Private Sector Houses:

Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group

Infrastructure Market Capacity

Key Statistics on Infrastructure Investments: As per Infrastructure Australia, known investment is expected to peak at $52 billion in 2023. Average annual growth stands at 33%, outstripping the industry’s confidence in its capacity to deliver on budget and on time.

Demand for Skills and Labour: The peak demand for skills stands 48% higher than the supply. A pre-requisite for meeting this demand is the annual growth rate of 25% over the next two years, almost 8x more elevated than the estimated annual growth rate of 3.3%. In addition, the 2021 Australian Infrastructure Plan holds a reform agenda to infuse growth in industry productivity and innovation.

Key Statistics on Construction Activities

Construction Work Done: For September 2021 quarter, the total value of construction work done inclined by 3.5% PcP while assuming a modest decline of 0.3% due to stringent lockdown measures in NSW, Victoria, and the ACT. The sequential decrease was vastly attributed to a 0.9% decline in the value of building work done and a 2.2% decline in non-residential work done, partially offset by a 0.4% uptick in engineering construction work.

Private New Capital Expenditure: Total capital expenditure on building and structures widened by 9.0% in September 2021 quarter (YoY) while marginally declining by 0.2% on a sequential basis. The fall was advocated by containment measures to combat the potential uprise of the Delta variant of COVID-19. As a result, the total capex in construction activities surged significantly by 35.1% PcP and sequentially assumed a 0.9% modest decline.

Figure 2: Capital Expenditure in Buildings and Structures:

Source: Based on Australian Bureau of Statistics, Analysis by Kalkine Group

Index Performance

The ASX 200 Real Estate (Industry Group) Index and The ASX 200 ASX 200 Materials (GIC) Index posted 8-year returns of +65.95% and +58.43%, respectively. Growing government support, prudent affordability measures, rising household income, and improved capital expenditure are supportive factors driving sector gains.

Figure 3: The ASX 200 Real Estate (Industry Group) and The ASX 200 Materials (GIC) outperformed the ASX 200 Index in the past eight years by whopping ~25.61% and ~18.07%, respectively.

Source: REFINITIV as on 02 December 2021

Key Risks and Challenges

Figure 4: Key Drivers vs Key Constraints

Source: Analysis by Kalkine Group

Considering the slowdown in RBA’s bond purchase program, interest rates are expected to increase in the coming months. Surging real estate prices may outweigh government initiatives; hence affordability may remain a significant concern. Infrastructure investment activities may enter a cooldown period considering containment restrictions and a noticeable shortage of labour. The low-income earners, falling on the lowest 40% of household distribution, are most likely to lack the resources to face changing housing market factors. Housing activities in metropolitan cities have eroded with significant crowd movement to regional or outer metropolitan areas owing to substantial alterations in housing preferences. The recent negative impact of COVID-19 on household income and expenditure may sustain; therefore, scenarios for the housing market may remain unfavourable.

Outlook

Low-Interest Rates: Home loans have surged significantly with dropping interest rates – 2.68% for a new home loan and 3.02% for outstanding loans. This has addressed affordability concerns, and RBA expects low rates to sustain until at least 2024.

FY22 Budget Focus on Infrastructure: The Australian government delivered a $110 billion 10-year rolling infrastructure pipeline to secure a world-leading position in economic recovery. The significant boost to infrastructure activities shall provide high demand for the materials industry.

Surged Demand for Skills, Plant and Materials: As per Infrastructure Australia’s first report on Infrastructure Market Capacity, a surge in demand for skills, labour and materials is forecasted amidst rapid uplift in public infrastructure investment.

Favourable Capex Activities: As per the Australian Bureau of Statistics, capital expenditure in building and structures for FY22 is estimated to stand at $78.6 billion, revised upwards by 5.8% from the previous estimate.

Support from NHFIC: The National Housing Finance and Investment Corporation (NHFIC) issued six bonds valuing ~$2 billion to uplift the Affordability Housing Bong Aggregator program in helping the community housing sector access low-cost long-tenor funds.

II. Investment theme and stocks under discussion (SGP, GDI, BLD, CMW)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/Sales’ multiple method.

1. ASX: SGP (Stockland Corporation Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$10.21 billion)

SGP is engaged in creating residential & retirement communities, retail town centres and workspaces.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of 18.28% on 02 December 2021. However, the stock might trade at a slight discount compared to its peers’ average EV/Sales (NTM trading multiple), given the potential threat of the new COVID-19 variant and low retention levels. For valuation, peers such as Aspen Group Ltd (ASX: APZ), Cromwell Property Group (ASX: CMW), Mirvac Group (ASX: MGR) are considered. Given the improved rent collection rates, higher FFO, rising cash contribution from operating cash flows, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the current market price of $4.230, as of 02 December 2021, at 10:40 AM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 5.74%.

2. ASX: GDI (GDI Property Group)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$593.59 million)

GDI is an integrated, internally management property and funds management group.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of 17.59% on 02 December 2021. Moreover, the company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple) given potential uprise in building activities and GDI’s portfolio of high upside assets. For valuation, peers such as ALE Property Group (ASX: LEP), Arena Reit No 1 (ASX: ARF), Home Consortium Ltd (ASX: HMC) are considered. The upside potential in GDI assets, government support to real estate businesses, current trading levels, and upside indicated by valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.085, as of 02 December 2021, at 03:20 PM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 7.04%.

3. ASX: BLD (Boral Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$6.70 billion)

BLD is a producer and distributor of building and construction materials in Asia, the US and Australia.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of 12.04% on 02 December 2021. Moreover, the stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given a favourable liquidity position with diluted financial distress. For valuation, peers such as Adbri Ltd (ASX: ABC), Brickworks Ltd (ASX: BKW), CSR Ltd (ASX: CSR) have been considered. Given the improved infrastructure outlook, ongoing non-residential construction, high FCF levels, and valuation, we give a “Hold” recommendation on the stock at the closing price of $6.040, down by ~0.658% as of 02 December 2021.

4. ASX: CMW (Cromwell Property Group)

(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$2.25 billion)

CMW is a real estate investment and management firm with a property portfolio in Australia and AUM in New Zealand, Australia, and Europe.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of 7.59% on 02 December 2021. Moreover, the stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given relative robust performance in an investment portfolio. For valuation, peers such as GPT Group (ASX: GPT), Stockland Corporation Ltd (ASX: SGP), Charter Hall Retail REIT (ASX: CQR) are considered. Given the development pipeline, prudent occupancy rate, resilient rent collection activities, and valuation, we give a “Hold” recommendation on the stock at the closing price of $0.855, down by ~0.582% on 02 December 2021. In addition, the stock has delivered an annualised dividend yield of 7.84%.

Note: All the recommendations and the calculations are based on the closing price of 02 December 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.  

Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the factors discussed above.

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