It has long been discussed that the Australian property market is in a slump, but recent ABS data shows the full extent and may have ASX builders like Mirvac Group (ASX: MGR) and Stockland Corporation Ltd (ASX: SGP) worried.
What Does The Data Say?
We know that house prices have been dropping; 7.8% in Sydney from December quarter 2017 to December quarter 2018 and 6.4% in Melbourne. This has an obvious effect on builders of new developments as the sales prices will be lower.
More recent, and perhaps more worrying data shows that the number of dwelling unit approvals dropped 27% from January 2018 to January 2019. Breaking the data down, private sector houses dropped 9.3% and private sector dwellings excluding houses fell 46.7%.
Total building approvals also fell 18.1% over the same period. With this large reduction in approvals, builders like Mirvac and Stockland might see a reduction in demand and revenue over the coming years.
Companies that are heavily exposed to Sydney and Melbourne could come off worse than companies that have a more diversified portfolio. While Sydney and Melbourne’s prices have been weak, property prices have been increasing in Hobart, Adelaide and Canberra.
From December quarter 2017 to December quarter 2018, Adelaide saw an increase of 1.5%, Canberra 1.8% and Hobart 9.6%.
What You Need To Remember…
While it’s not all doom-and-gloom for ASX companies in the real estate sector, there are certainly risks. If I were going to invest in one, I would look for a company that doesn’t focus too heavily on Sydney and Melbourne, or one that is not solely focused on residential property.
For example, Stockland has residential projects through Sydney, Melbourne, Brisbane, Perth, Townsville, Canberra and Newcastle. They also operate in the retirement living, shopping centre and leasing spaces, adding diversity to the business and possibly benefiting from an ageing population through the retirement living sector.
I recently wrote about the risks Mirvac faces here. Mirvac operates in the office, industrial, retail and residential spaces but they are more heavily focused on Sydney and Melbourne.
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
