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 trillion in 2019, wherein the real estate sector contributed 10.9% and stood at $110.9 billion. For FY20, the total contribution of rental, hiring and real estate services clocked 2.9% of $1,808 billion Gross Value Added (GVA).

Sequential Drop in Building Approvals but Stayed above Last Year:

Movement in Dwelling Units: Total dwelling units approved stood at 20,163 units in May 2021, down 7.1% MoM but up 52.7% PcP. The monthly decline was predominantly attributed to private sector houses which had declined by 10.3% MoM from the recorded high in April 2021. In contrast, private sector dwellings excluding houses surged by 1.2% MoM in May 2021 amidst an uptick in Western Australia’s apartment approvals.

Movements in Value of Buildings Approved: The value of total buildings approved stood at ~$129.45 billion, a surge of 4.5% MoM, primarily driven by a 28.5% MoM surge in the value of non-residential buildings due to an increase in public sector projects, partially offset by 6.7% MoM decline in value of total residential buildings. All the Australian states, excluding Victoria and Tasmania, assumed significant declines in total dwelling units.

Figure 1: Recovery in Dwellings Approved Post COVID-19 Aftermath:

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

Upswing in Building Activities:

Construction Commencements: For the March 2021 quarter, the commencements of new private sector house increased by 5.9% QoQ and a significant +40.2% PcP. Contrarily, commencements in other new residential dwellings in the private sector nosedived by 11.3% and stood at 14,667 units. Thus, an exponential upswing was witnessed in private house dowelling commencements post June 2020 quarter.

Capital Expenditure: In consequence of government-led infrastructure revival and other measures, the total private new capital expenditure surged by 6.3% QoQ, and private new capex in buildings and structures surged by 3.8% QoQ, stood at $16.19 billion.

Momentum Continues in Residential Property Prices:

Residential Property Price Index (RPPI): The weighted average of eight capital cities (RPPI) inclined by 5.4% QoQ and 7.5% PcP. As of 31 March 2021, mean residential dwellings price stood at ~$779,000, and the total value of residential dwellings reached $8,293.2 billion, including both public and private sectors. On a QoQ scale, both Sydney and Hobert inclined the most by 6.1%. Thus, low-income earners are majorly susceptible to housing insecurity amidst rising private housing prices.

Figure 2: State-wise Residential Property Price Index:

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

Conducive Government Policies Driving the Sector:

First Home Loan Deposit Scheme (FHLDS): The government initiated the scheme to financially back first home buyers. Under the scheme, 10,000 FHLDS places will be accessible for the first home buyers. In addition, features like below 20% deposit requirement for lenders mortgage insurance and part-loan guarantee by National Housing Finance and Investment Corporation (NHFIC) may boost building activities.

The HomeBuilder Program: The program was an Australian government initiative to support real estate construction by granting owner-occupiers to renovate existing homes and build new homes. On 19 November 2020, the Morris government extended the program, which was expected to assist major build or construction of around 15,000 homes.

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. The program is specifically focused on single parents with respective dependents.

Index Performance:

The ASX 200 Real Estate (Industry Group) and the ASX 200 REIT Index posted a return of ~+83.60% and ~+88.54% in the past decade, respectively, as compared to ~+59.40% 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 ~24.20% and ~29.14%, respectively:

Source: REFINITIV as on 15 July 2021

Key Risks and Challenges:

Only 230 international students arrived in Australia in March 2021, a decrease of ~60,100 relative to March 2020, which dramatically affected 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:

Source: Analysis by Kalkine Group

Outlook

The community housing dwellings units jumped three-fold from 32,000 dwellings (2006) to 103,900 in (2020) in line with a surge in social housing demand. The government’s Commonwealth Rent Assistance (CRA) witnessed a surge in income units from 1.29 million in June 2019 to 1.7 million in June 2020, signifying significant financial support to home buyers. The government estimated $8.4 billion spent to cushion the distressed housing factors and facilitate access to affordable and secure housing. Private dwellings value and units have increased significantly, which dampened pandemic effects to a great extent. New private capital expenditure in building and construction activities has surged, reflecting growth and stability prospects for the housing market.

II. Investment theme and stocks under discussion (SCG, CWP, CHC, LEP)

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 ‘Price/Earnings’ method.  

1. ASX: SCG (Scentre Group)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$13.85 billion)

SCG is engaged in property investments by owning and operating a portfolio of living centres in Australia and New Zealand.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 20.73% on 15 July 2021. Moreover, we believe that the stock might trade at some premium compared to its peer average Price/Earnings (NTM Trading multiple) given improving customer visitation and stable fundaments (excluding the nonrecurring rental relief). For the said purposes, we have taken peers such as GPT Group (ASX: GPT), Charter Hall Retail REIT (ASX: CQR), Carindale Property Trust (ASX: CDP), to name a few. Considering the reinvestment decisions, recent project developments, improved customer visitations, and valuation, we give a “Buy” recommendation on the stock at the current market price of $2.600, down by ~2.622% on 15 July 2021. In addition, the stock has delivered an annualised dividend yield of 2.69%.

2. ASX: CWP (Cedar Woods Properties Ltd)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$528.74 million)

CWP is engaged in property investment and development of commercial and residential communities.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 17.10% on 15 July 2021. Moreover, we believe that the stock might trade at some premium compared to its peer median Price/Earnings (NTM Trading multiple) given improved top-line, federal & state-based stimulus and improved gross margin. For the said purposes, we have taken peers such as LendLease Group (ASX: LLC), Servcorp Ltd (ASX: SRV), Peet Ltd (ASX: PPC), to name a few. Considering the improved pre-sale figures, recovering fundamentals, low interest rate scenario, and valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $6.520, up by ~0.307% on 15 July 2021. In addition, the stock has delivered an annualised dividend yield of 2.99%.

3. ASX: CHC (Charter Hall Group)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$7.13 billion)

CHC is engaged in an integrated property organization with core activities in property funds investment and management.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 14.31% on 15 July 2021. However, we believe that the stock might trade at a slight discount compared to its peer median Price/Earnings (NTM Trading multiple) given potential challenges in real estate market. For the said purposes, we have taken peers such as GPT Group (ASX: GPT), BWP Trust (ASX: BWP), Ingenia Communities Group (ASX: INA), to name a few. Considering the diversified investment portfolio, update on improved FUM, high recovery potential in real estate market, and valuation, we give a “Hold” recommendation on the stock at the current market price of $15.220, down by ~0.653% on 15 July 2021. In addition, the stock has delivered an annualised dividend yield of 2.48%.

4. ASX: LEP (ALE Property Group)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$992.01 million)

LEP is involved in the business of owning freehold pub properties in Australia.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 10.70% on 15 July 2021. Moreover, we believe that the stock might trade at some premium compared to its peer median Price/Earnings (NTM Trading multiple) given decent comparative fundamentals, increased CPI, and favourable liquidity position. For the said purposes, we have taken peers such as Goodman Group (ASX: GMG), Home Consortium Ltd (ASX: HMC), Goodman Property Trust (ASX: GMT), to name a few. Considering the top-line progress, substantial improvements in NPAT, prudent risk measures, and valuation, we give a “Hold” recommendation on the stock at the current market price of $4.880, down by ~1.415% on 15 July 2021. In addition, the stock has delivered an annualised dividend yield of 4.40%.

Note: All the recommendations and the calculations are based on the closing price of 15 July 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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