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, 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 contribution of rental, hiring and real estate services clocked 2.9% of $1,808 billion Gross Value Added (GVA).
Building and Construction Activities
Surged in Construction Work Done: In the June 2021 quarter, building work was done by 0.1% QoQ and 2.8% PcP and clocked $30.56 billion. Residential work done incurred a marginal fall of 0.1% QoQ but remained elevated with +8.9% PcP growth and stood at $19.05 billion. Total construction value inclined to $52.88 billion, up by 0.8% QoQ and 0.4% PcP amidst favourable government policies for housing and engineering construction activities.
Capital Expenditure: In consequence of government-led infrastructure revival and other measures, the total private new capital expenditure surged by 4.4% QoQ (+11.5% PcP) and clocked $32.68 billion in June 2021 quarter, and private new capex in buildings and structures surged by 4.6% QoQ (+6.5% PcP), stood at $16.89 billion.
Figure 1: Trend in the Value of Building Work Done:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Update on Australia’s Building Approvals
Dwelling Approval Momentum Reaching Saturation: In July 2021, total dwelling units approved fell by 8.6% on a sequential basis and reached 17,601 units (up by 21.5% PcP), private sector houses fell by 5.8% and reached 11,671 units (up by +28.0% PcP), and private sector dwellings apart from houses declined by 12.3% and reached 5,679 units (up by +12.4% PcP).
Update on Value of Buildings Approved: In July 2021, the value of total buildings approved stood at ~$10,817.6 million, a decline of 15.9% on a sequential basis, primarily attributed to a 30.5% MoM fall in the value of non-residential buildings due to a decline in public sector projects and 7.6% sequential decline on a new residential building.
Figure 2: Spike and Fall in Total Dwelling Units Approved:
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Residential Property Prices
Residential Property Price Index (RPPI): The weighted average of eight capital cities (RPPI) inclined by 6.7% QoQ and 16.8% PcP in the June 2021 quarter. As of 30 June 2021, residential dwellings price (mean) stood at ~$835,700 (up by $52,600), and the total value clocked to $8,924.6 billion (up by $596.4 billion), including both public and private sectors. On a QoQ scale, Sydney and Canberra inclined the most on a sequential basis by 8.1% and 8.2%, respectively. Thus, low-income earners are majorly susceptible to housing insecurity amidst rising private housing prices.
Index Performance
The ASX 200 Real Estate (Industry Group) (AXREJD) and the ASX 200 REIT Index (AXPJ) posted a return of ~+110.51% and ~+119.30% in the past decade, respectively, as compared to ~+83.86% by the ASX 200 Index. Rapid urbanization, low interest rates, and supportive government policies are some of the supporting factors driving the sectoral gains.
Figure 3: The ASX 200 Real Estate (AXREJD) and the ASX 200 REIT Index (AXPJ) outperformed the ASX 200 Index in the past 10 years by a whooping ~26.65% and ~35.44%, respectively:
Source: REFINITIV as on 23 September 2021
Key Risks and Challenges
As per Australian Institute of Health and Welfare, only 230 international students arrived in Australia, a decrease of ~60,100 relative to March 2020, dramatically affecting the rental market in metropolitan cities, especially in Melbourne, Sydney and Brisbane. Rising real estate prices may outpace government initiatives; hence affordability may remain a significant concern. Low-income earners, falling on the lowest 40% of household distribution, are most likely to lack the resources to counter changing housing market factors. Housing activities in metropolitan cities have diluted with significant crowd movement to regional or outer metropolitan areas amidst significant 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.
Figure 4: Key Risks and Challenges in the Real Estate Sector:
Source: Analysis by Kalkine Group
Outlook
Australia’s Real Estate sector is expected to benefit from a number of government schemes and factors as outlined below.
Figure 5: Key Driving Forces:
Source: Analysis by Kalkine Group
Low-Interest Rates: Home loans have surged significantly with dropping interest rates – 2.72% for a new home loan and 3.05% for outstanding loans. It has addressed affordability to a reasonable extent. RBA expects low rates to sustain until at least 2024.
Favourable Capex Activities: Capital expenditure in building and structures for FY22 is estimated to stand at $74.70 billion, revised upwards by 7.6% from the previous estimate. For FY21, the estimate stands at $65.44 billion, moderately down by 1.7% from the previous estimate but still at elevated levels.
First Home Loan Deposit Scheme (FHLDS): The government initiated the scheme to financially back first home buyers. It includes features like below 20% deposit requirement for lenders mortgage insurance and part-loan guarantee by National Housing Finance and Investment Corporation (NHFIC).
Family Home Guarantee: As per the 8 May 2021 update from NHFIC, the government announced the Family Home Guarantee program to assist 10,000 new homes construction or purchases on existing homes at a 2% deposit.
Fresh Funding for Social and Affordable Housing: NHFIC has established an innovative funding model to cut down 80% upfront cost of building social and affordable housing. The model focuses on harnessing contributions from federal and state governments.
II. Investment theme and stocks under discussion (CMW, GDI, SCG, VCX)
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 methods.
1. ASX: CMW (Cromwell Property Group)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$2.15 billion)
CMW is a real estate investment and management firm with portfolio covering Australia, New Zealand, and Europe.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 18.42% on 23 September 2021. The company 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 purposes, peers like GPT Group (ASX: GPT), Mirvac Group (ASX: MGR), Ingenia Communities Group (ASX: INA) are considered. Considering development pipeline, prudent occupancy rate, resilient rent collection activities, and valuation, we give a “Buy” recommendation on the stock at the current market price of $0.833, as of 23 September 2021, at 10:53 AM (GMT+10), Sydney, Eastern Australia. In addition, the stock has delivered an annualised dividend yield of 8.48%.
2. ASX: GDI (GDI Property Group Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$630.98 million)
GDI is engaged in property investments and funds management business.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 16.39% on 23 September 2021. However, the company might trade at a slight discount compared to its peers’ average EV/Sales (NTM trading multiple) given declining FFO. For valuation purposes, peers like ALE Property Group (ASX: LEP), Centuria Industrial Reit (ASX: CIP), Arena REIT No 1 (ASX: ARF) are considered. Considering the upside potential in GDI assets, government support to real estate businesses, and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.160, as of 23 September 2021, down by ~0.430%. In addition, the stock has delivered an annualised dividend yield of 6.65%.
3. ASX: SCG (Scentre Group)
(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$15.31 billion)
SCG is engaged in property investments by owning and operating a living centre portfolio in New Zealand and Australia.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 10.63% on 23 September 2021. The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given recovery in customer visitation level and increased speciality in-store sales. For valuation purposes, peers like Carindale Property Trust (ASX: CDP), Centuria Capital Group (ASX: CNI), Vicinity Centres (ASX: VCX) are considered. Considering the increase in gross rental collections, expected increase in distribution, and valuation, we give a “Hold” recommendation on the stock at the current market price of $2.950, as on 23 September 2021. In addition, the stock has delivered an annualised dividend yield of 4.74%.
4. ASX: VCX (Vicinity Centres)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$7.62 billion)
VCX is engaged in the business of property investment, management, development, and leasing and management of funds.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 9.01% on 23 September 2021. Moreover, the company might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple), given strategic partnership potential, and reduced financial risk. For valuation purposes, peers like GPT Group (ASX: GPT), Charter Hall Retail REIT (ASX: CQR), Centuria Capital Group (ASX: CNI) are considered. Considering the expected upside in valuation, current trading levels, decent occupancy rate, and recovery in the retail segment, we give a “Hold” recommendation on the stock at the current market price of $1.700, up by ~1.492% on 23 September 2021. In addition, the stock has delivered an annualised dividend yield of 5.97%.
Note: All the recommendations and the calculations are based on the closing price of 23 September 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decision should be made depending on the investors' appetite on 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 subject to the factors discussed above.
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