The Australian Bureau of Statistics has recently reported data on weighted average residential property prices in the June quarter, wherein property prices across majority of the eight capital cities covered in the data, increased on a YoY basis. Although the current economic environment has been challenging for the property market due to massive fall in demand, the increase in home loan commitments in July provided a new ray of hope. Moreover, the Commonwealth Bank of Australia improved its forecast for house prices, signalling a better future for the industry. Let us now have a look at these aspects in detail.

ABS Property Prices Data: The ABS released June quarter data for Residential Property Prices, providing details about the weighted average residential property prices for eight capital cities in Australia. According to the data, property prices in Brisbane reported the highest QoQ fall in the June quarter among all eight cities. The decline stood at 2.3% in comparison to the March quarter. Melbourne and Sydney were next in-line with a decline of 2.2% and 1.8%, respectively, on the March quarter. All the cities, except Canberra, reported a decline in property prices on the previous quarter.

On the prior corresponding period, residential property prices witnessed an improvement in all the three cities. Notably, prices in Sydney, Melbourne and Brisbane increased at a rate of 6.2%, 8.1%, and 8.8%, respectively. Total value of residential dwellings in the June quarter stood at $7,138.2 billion.

Residential Property Prices Highlights (Source: ABS)

Increase in Home Loan Commitments: As social distancing restrictions eased in most states and territories, the value of new loan commitments for housing increased sharply by 8.9% in July 2020. For owner occupier housing, the value of new loan commitments increased by 10.7% and that for investor housing increased by 3.5%. New South Wales, Victoria and Queensland reported the largest increases in new loan commitments for owner occupier housing. In Victoria, the value increased by 8.9%, impacted by opening of the state followed by the reinstatement of restrictions due to a second wave of COVID-19.

Revision of House Price Forecasts by CBA: In its latest data (August 2020) from the Commonwealth Bank Household Spending Intentions (HSI) series, the CBA highlighted on how spending across various categories had stalled due to the reinstatement of restrictions in Victoria. The bank highlighted the impact of stage 4 restrictions in greater Melbourne in August. Improved spending intentions with respect to travel, entertainment, retail, home buying, etc., came to a halt. Spending intentions for health and fitness and motor vehicle continued to rise. According to Stephen Halmarick, Chief Economist at Commonwealth Bank, the lockdown in Melbourne, and an expected decline in population will continue to impact the home buying intentions in the months to come. On the contrary, home buying is expected to be supported by low interest rates. The CBA also revised its house price forecasts for a peak-to-trough decline of -6% as compared to the previously forecasted decline of -10%.

Home Buying Spending Intentions (Source: Household Spending Intentions Series, CBA)

RBA’s Rental Property Market Outlook: The RBA’s released on the Rental Market and COVID-19 throws light on the impact of the pandemic on the rental housing market. Due to the outbreak of COVID-19, the demand for rental properties has declined. Border closures and international arrivals have aggravated the situation, leaving the market in excess supply. As a result, vacancy rates in Australia increased sharply. As per the RBA’s report, vacancy rates in the inner regions of Sydney and Melbourne increased by around 2% and slightly more than 1% in the outer suburbs. With the suppression of COVID-19 and gradual reopening across all states and international borders in the near term, rental demand in inner Sydney and Melbourne is expected to increase, which will support house rent amount as vacancy rate reduces. 

Key Risks: To reiterate, the improvement in home buying intentions is subject to the duration of lockdown restrictions. Continued spread of COVID-19 might delay recovery in intentions as people continue to withhold money to prepare for future uncertainties. The expected decline in Australia’s population is another factor shaping up predictions for unfavourable home buying intentions. Last but not the least, the RBA expects any failure in controlling the virus and further lockdowns and restrictions, to adversely impact demand in the rental housing market.

Overall, as the current COVID-19 situation subsides and the economic conditions continue to improve, there will be room for the property market to grow and recover from the pandemic impacts. An assessment of the movement in residential property prices, changes in home buying intentions, revised house price forecasts by the CBA, and the RBA’s outlook on the rental property market, reinstates our confidence in the long-term potential of the property market. The below section provides an overview of 4 property stocks in ASX which have demonstrated a resilient performance in the current operating environment.

1. Stockland (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 8.68 Billion, Annual Dividend Yield: 6.62%)

Decent Capital Position: Stockland (ASX: SGP) owns, manages, and develops a range of assets, which include shopping centres, office, and industrial assets. As on 21^st September 2020, the market capitalization of the company stood at ~$8.68 billion. In FY20, the company reported funds from operations amounting to $825 million, representing a decline of 8.0% on FY19 due to COVID-19 impacts. Strong residential settlements during the period resulted in net operating cashflows of $1.1 billion. AFFO per security stood at 31.0 cents, down 4.6% on FY19. During the year, the company reported a statutory loss of $14 million. Net gearing for the period improved to 25.4%, from 26.7% as at 30^th June 2019. 

Outlook: Due to continued uncertainty with respect to COVID-19, the company did not provide any guidance for FY21. The company’s strategy is focused on leveraging its diversified model to grow returns and improve portfolio quality. The company has a development pipeline of $5.5 billion in its Workplace and Logistics portfolio, which is expected to deliver positive results in the upcoming financial years. 

The company’s residential property portfolio seems to be well-placed for near term growth through strong demand drivers and improved sales performance. Strength in demand was driven by government stimulus, credit availability, increase in customer preference for low-density communities, etc. As on 31^st July 2020, the company had ~4,300 contracts on hand to provide reasonable coverage for FY21 settlement volumes.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs SGP (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: In the last one month, the stock gave positive returns of 5.81% on ASX. The stock of the company is currently trading at attractive levels and retains further potential for growth. Going forward, SGP’s strong cash flow profile, a resilient portfolio of assets and a diligent check on COVID-19 impacts will be the key catalysts for growth. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $3.630, down 0.275% on 21^st September 2020.

 

2. Cromwell Property Group (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 2.3 Billion, Annual Dividend Yield: 8.52%)

Operating Profit Up ~27% on PCP: Cromwell Property Group (ASX: CMW) is an internally managed Australian REIT and a property fund manager. As on 21^st September 2020, the market capitalization of the company stood at ~$2.3 billion. During FY20, the company reported an underlying operating profit of $221 million, representing an increase of 27.0% on FY19. Net Tangible Assets per unit increased to $0.99, from $0.97 in FY19. At the end of the period, the company had $8.2 billion in Assets under Management and liquidity worth $667 million. Distribution for the year stood at 7.50 cents per security, up 3.4% on pcp.

Outlook: The company reported a decent performance in FY20, with growth across all segments. The company’s substantial liquidity position and a pipeline of ~$1.1 billion in new value add development opportunities in the direct property investment segment is expected to provide support to future performance. In the Funds and Asset Management segment, the company has new growth opportunities in the form of Cromwell European Logistics Funds, Cromwell Data Centres Fund, and Cromwell Polish Retail Fund to expand the platform. 

The company provided FY21 distribution guidance of 7.50 cents per share, subject to no material adverse change in market conditions. Going forward, the company will continue to optimize its core portfolio and will progress on its development pipeline to take advantage of any positive industry trends in the future. The business seems to be well-placed to navigate through COVID-19 risks with a decent balance sheet and 45% of rental income from government entities.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs CMW (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: In the last six months, the stock has corrected by 7.37% on ASX and is currently trading towards its 52-week low of $0.675. The stock of the company is trading at attractive levels and has a potential for growth, backed by multiple growth opportunities discussed in the above section. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $0.855, down 2.841% on 21^st September 2020.

 

3. Lendlease Group (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 8.07 Billion, Annual Dividend Yield: 2.83%)

Decent Strategic Progress: Lendlease Group (ASX: LLC) is an international property and investments group having core expertise in shaping cities and creating strong and connected communities. As on 21^st September 2020, the market capitalization of the company stood at ~$8.07 billion. During 2HFY20, the company’s core business was impacted by COVID-19, which resulted in a statutory loss after tax of $310 million for FY20. The company’s core business reported an after-tax loss of $212 million in the second half. However, development pipeline in the business increased by 48% to $113 billion. During the year, the company progressed on its strategy and secured two major urbanisation projects and three new investment partnerships, which are expected to positively impact the future performance. 

Outlook: With a decent financial position and a solid development pipeline, the company seems to be well placed to navigate the uncertainty of COVID-19 and deliver long-term growth.The company entered FY21 with a strong position backed by growing  urbanization projects across the US and Europe in its core business. Notably, the company has a construction backlog revenue of $14 billion for the core business. Moreover, its investment segment is expected to deliver recurring earnings from a solid position of investments, FUM, and AUM.

Considering the company’s liquidity position and the business development during FY20, we can say that LLC is well positioned to take advantage of opportunities that arise in the post-COVID period. If the industry improves in the upcoming period, the company is expected to grow further on the back of its robust development pipeline and investment partnerships.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs LLC (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: In the last three months, the stock has corrected by 9.70% on ASX. The stock of the company has demonstrated a resilient performance and retains decent potential for growth on the back of LLC’s development pipeline, resilient financial position, and new projects in the portfolio. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Buy” recommendation on the stock at the current market price of $11.950, up 1.876% on 21^st September 2020.

 

4. Dexus Group (Recommendation: Hold, Potential Upside: Low Double-Digit)

(M-cap: A$ 9.84 Billion, Annual Dividend Yield: 5.58%)

FY20 AFFO In Line with FY19: Dexus (ASX: DXS) is an Australian REIT that owns, manages, and develops high-quality real estate assets and real estate funds on behalf of third-party investors. As on 21^st September 2020, the market capitalization of the company stood at ~$9.84 billion. The company recently released its FY20 results, wherein, it reported AFFO per security amounting to 50.3 cents, in line with FY19. Despite the COVID-19 challenges, the company reported solid achievements across key resources and delivered on its strategy. Total funds under management for the year stood at $32 billion. NPAT for the year was down by 23.3% primarily due to lower net revaluation gains of investment properties than FY19. Notably, both the office and industrial portfolios outperformed their relevant benchmarks over one, three and five years to 31^st March 2020. 

Outlook: Going forward, the company aims to optimise its property portfolio and is looking to expand its funds management platform. Gearing for FY20 remained conservative at 24.3%, with $1.6 billion of cash and undrawn debt facilities. The company entered into some agreements for sale of assets after 30^th June 2020 which is expected to contribute ~$85 million to pre-tax trading profits across FY21 and FY22.

The company has a track record of delivering on its strategy and possesses a quality property portfolio along with an experience management team, which is expected to drive growth as the pandemic situation stabilizes. The company’s office property portfolio has demonstrated resilience in the current economic environment, and it remains focused on maintaining high portfolio occupancy.

 

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs DXS (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: In the last one month, the stock has given positive returns of 7.25% on ASX. The stock of the company has witnessed decent price movements in the past few months and will be supported by its quality portfolio, investments in technology, and a diversified customer base. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). Hence, we give a “Hold” recommendation on the stock at the current market price of $8.700, down 3.548% on 21^st September 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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