This article is from the Australian Property Journal archive
INVESTORS wanting to position for a recovery in residential volumes and earnings are best to put their money in apartments, build-to-rent and manufactured housing estates, rather than house-and-land, according to UBS.
In a note entitled Not your average resi cycle, UBS analysts Tom Bodor, Grant McCasker and Cody Shield said they “see this cycle as very different”.
“COVID saw government stimulus and ultra-low interest rates drive extreme resi demand but production lagged impacted by: lockdowns, COVID absenteeism and material shortages (global supply chains).”
The three key themes were headed by affordability, with mortgage repayments typically 20 to 30% of income but now approaching a record 40%0plus as mortgage rates increased from ~2% to ~6%.
Demand was also identified, with immigration of 387,000 in 2023 – well above the long-term average of about 200,000 keeping rental vacancy below 2% and supporting circa 10% rent growth.
In addition, they expect production challenges to remain, with no rapid normalisation of approvals to over 100,000 houses due to a lack of skilled labour and crowding out from non-resi construction.
“Should demand weaken from here, there is less ability for governments to stimulate via incentives or interest rate cutes (per prior cycles) given persistent inflation.”
The UBS analysts said higher rates have deferred a land recovery against its previously positive view with “continued production challenges/higher costs for new houses causing us to shift preferences to apartments where we expect sales to outperform (from a lower base) due to better relative affordability”.
In build-to-rent, they see “significant medium-term volume growth potential” (five to 10x from a low base), with returns to be generated from rental growth – in the medium-term, mid-single digits – and management income streams, requiring scale to drive value, rather than development profits.
Meanwhile, manufactured home estates will benefit from cost-of-living pressures causing retirees to consider downsizing, and assistance in the form of government rental subsidies support affordability and could drive a doubling of manufactured home estate volumes over the next three years.
UBS said its Stockland and Mirvac earnings forecasts have moved 5% lower in FY24/25, reflecting a slower recovery for land sales and commercial development headwinds. It downgraded Stockland from buy to neutral due being to circa 7% to 10% below on land volumes, while it upgrade both Mirvac and Lifestyle Communities from neutral to buy reflecting superior expected FY24-27 growth (at 7% and 11% respectively) due to recovering volumes given the better relative affordability of product such as manufactured home estates and apartments.
It currently prefers Mirvac over Stockland and Lifestyle Communities over Ingenia.
