The Wrap: Property, Super, Housing & Cars

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Weekly Broker Wrap: property; superannuation; cash rates; house prices; automotive retailers; and registry services.

-A-REITs becoming more attractive to global investors
-PC proposals threaten retail super sector
-Credit tightening likely to be a game changer for Oz house prices
-Oz car sales likely to fall following slump in house prices
-Ord Minnett suggests outlook for registry sector remains weak

By Eva Brocklehurst

Property

Global investors consider A-REITs more attractive because of their relative underperformance, although they are increasingly concerned about the residential segment. Morgan Stanley has come to this view after meetings with investors in Europe, US and Asia.

Valuation and relative performance are the main reasons A-REITs have increased their appeal over the past 12 months. Those investors that find the sector less attractive cite deteriorating macro conditions. A major debate centres on the penetration of Amazon and online retail for those A-REITs exposed to shopping centres.

The broker's discussions have reinforced its preference for office over retail and, within retail, Vicinity Centres ((VCX)) and Stockland ((SGP)) over Scentre Group ((SCG)) and Mirvac ((MGR)). Developers such as Lend Lease ((LLC)) and Goodman Group ((GMG)) are preferred over the aggregators such as Charter Hall ((CHC)).

The broker finds many investors were surprised by the level of capital expenditure required to maintain sales growth and were also interested in the accelerating momentum in the Lend Lease business, which increases the scope for a re-rating.

Superannuation

The Australian government's Productivity Commission has published a draft report assessing the competitiveness of the superannuation system, suggesting a radical overhaul.

Ord Minnett had expected the report would offer a small positive for retail funds by opening up default awards. Now, the broker believes the major proposals are a threat to the retail sector, to both corporate super and fees on choice products.

As a result of its analysis, Ord Minnett downgrades its rating on AMP ((AMP)) to Hold from Accumulate, believing further negative sentiment on the stock will ensue.

The broker also suggests there may be flow on to other wealth managers such as Link Administration ((LNK)). The government appears reasonably enthusiastic regarding the report and, with a loss of credibility for the super retail sector following the Royal Commission, Ord Minnett envisages the chances of the report being implemented are heightened.

The main issues are the many multiple accounts in the current system, with the PC believing one third of accounts are unnecessary. Most underperforming funds are in the retail segment, with unhealthy competition and a proliferation of funds noted in the choice segment.

There is also a lack of access for members to quality information in order to to make comparisons and the PC stated a need to have a new default allocation process, whereby members rather than employers select the fund.

Cash Rates

Credit Suisse ponders whether the banks could produce rate increases that are out of step with the official cash rate cycle and calculates there is a material risk that this will occur.

If the RBA does not cut official rates, out-of-cycle rate hikes could be expected from major banks, although the pass-through to end borrowers may still be limited. The broker estimates there is downside to calculations of long-term neutral cash rates, when accounting for an incomplete pass-through, and the neutral cash rate could be well below 2%.

Persistently wide interbank credit spreads may cause the banks to hike rates out of the cycle, the broker suspects, and a case can be made that, if these wide spreads persist, cash rates are actually above neutral, even before accounting for the growth and inflation outlook.

Hence, Credit Suisse contends that the interbank funding situation is the one element that may re-shape the RBA's outlook. If spreads narrow, the RBA is well placed to carry on with its medium-term plan to hike official rates. However, if spreads widen even further then the RBA needs to revise down its view of the neutral cash rate and the appropriateness of current settings.

All up, the broker suggests that de-leveraging risks emanating from the banking sector are likely to contribute to more revisions in the RBA's outlook, curve flattening and more inversion of Australian-US yield differentials. In this environment, within the equity market, Credit Suisse believes this supports quality over value.

House Prices

UBS takes a deep dive into the housing market, noting tighter credit and falling prices and dwelling commencements. March 2018 dwelling approvals rebounded to 235,000, nonetheless, supported by population growth. Given a dovish view on official rates (Reserve Bank is expected to hold the cash rate steady until at least the second half of 2019), the broker upgrades estimates for housing commencements.

The next phase of macro prudential tightening is likely to be a game changer, UBS speculates, amid higher living expenses and debt-to-income limits, which will cut borrowing capacity by around -30-40%. Housing is already weakening more quickly than the broker anticipated, with home loans dropping by -10% since August 2017, even before the impact of the Royal Commission into the financial services industry.

UBS shifts its base case towards a credit tightening scenario where home loans fall -20%, credit growth is flat and house prices drop persistently. Meanwhile, the RBA is expected to keep rates on hold for longer. Record housing supply in coming years and a drop in foreign buyers means UBS downgrades its outlook for house prices, expecting prices to drop more than -5% over the next year.

Automotive Retailers

UBS also believes car sales will follow falling house prices. House price data has already revealed recent weakness is in NSW and Victoria. In analysing the relationship with Australian car sales – indicative for Automotive Holdings ((AHG)) – and prestige/luxury sales – indicative for Autosports Group ((ASG)) – UBS maintains a Neutral rating on the former and downgrades the latter to Neutral from Buy.

The broker cuts FY19 estimates for earnings per share for Automotive Holdings by -12% and by -21% for Autosports. While UBS expects these two stocks to outperform on industry volumes, margins are likely to be lower in FY19 as a result of aggressive competition.

The broker's modelling estimates a -10% fall in house prices, which translates to total new car sales falling by -10% and new prestige/luxury cars by -8% over a two-year period. The rise of ride sharing and eventual onset of robotaxis could also lead to lower new car sales in the future, UBS suggests, expecting autonomous vehicles to be in operation in certain markets from 2026.

Registry Services

Ord Minnett concludes from surveys of Australian registry services that Computershare ((CPU)) has continued to lose market share to Link Administration and Boardroom, based on the number of contracts. Historically, this did not translate to loss of market share based on the number of shareholders administered, which is a better proxy for revenue, but this appears to the broker to be no longer the case.

The majority of respondents to the surveys indicated either an improved cost structure or no change to cost structures over the past 12 months. Ord Minnett notes that the percentage of registry contracts put to tender has increased materially since 2016. Costs were the main reason flagged by those who manage internally, which implies scale players with lower fees have opportunities to grow.

The broker also observes that smaller providers, primarily Boardroom, appear to be using employees share plan service contracts as a means of winning registry contracts, as companies show a preference for using the same provider.

Growth in the Australian registry sector has been muted historically and Ord Minnett believes the outlook remains weak, in particular for Computershare if it continues to lose shareholder administration as per recent trends. Its new investment in technology, through Equatex, may provide some competitive advantage.Computershare and Link Administration command 94% of domestic registry share based on the number of shareholders administered.

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