Mixed Outlook For Housing Related Sectors

Australia | Jul 22 2020

Brokers have analysed the current state of play for Australian housing and how they see the rest of the year play out, including the impact on the building materials sector and housing-related retail

-Data suggest a soft outlook for residential
-Varying exposures among building material companies
-Housing outlook impacts on related retail chains

By Greg Peel

Morgan Stanley has constructed a proprietary housing indicator, called MSHAUS, which is designed to lead house price and building approvals by three quarters. The most recent model update suggests conditions in housing will remain soft for the rest of 2020, although at this stage they are not expected to worsen significantly.

Morgan Stanley has also conducted a survey of construction industry professionals to gauge just what impact the virus is having.

Two-thirds of respondents noted at least a -20% reduction in activity had occurred to date, with around half noting that leads had more than halved. As result they expect to reduce headcount, meaning lay off workers, over the next 6-12 months.

In the residential space, 65% of respondents indicated that access to finance had deteriorated, 80% expected companies in the industry to face financial difficulty, and 44% expected closures.

Morgan Stanley thus expects construction approvals and activity to soften over the coming months, partially offset by government stimulus measures. Broader policies (JobKeeper/Seeker and loans to businesses) will taper from September, but given the government’s initial Homebuilder stimulus package was fairly modest, the broker is watchful of further housing-specific stimulus, particularly if soft conditions continue to the end of the year.

The RBA has provided support through rate cuts, and banks through the extension of mortgage repayment holidays, but a collapse in migration has diminished demand, as has resultant weakness in rents.

Given residential construction has the shortest pipeline, and concerns around financing, Morgan Stanley sees resi-construction as most exposed to a late 2020 “cliff”.

JPMorgan notes the collapse in migration has most impacted on apartment demand, but discussions with residential lot developers and homebuilders suggest enquiries and sales have picked up nicely over the past month. The broker is forecasting only a -5% decline in single-family (house) commencements this year.

Noting that Australia’s major building materials companies also have offshore exposure, JPMorgan points out the US housing market performance has been better than previously feared, but the outlook for construction in New Zealand remains weak.

Valuation

Taking a top-down, macro approach, Morgan Stanley favours infrastructure exposure and now seeks to avoid domestic residential exposure. Of the broker’s building material stocks under coverage, CSR ((CSR)) has the greatest exposure to residential.


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