Want to play the housing rebound? Here’s how

The surprise was where they planned to invest. They are not looking at the traditional sectors, with less than 10 per cent of those in the room expressing interest in retail (8 per cent), or office or logistics (9 per cent).

No. The high-powered investors in Singapore are interested in alternative real estate sectors such as childcare and healthcare, which attracted 38 per cent of the polling. And almost as many – 36 per cent of those polled – are intending to invest in the living sectors, such as build-to-rent, build-to-sell and student accommodation.

It is only an indicative poll. A Knight Frank survey of 150 family offices released on Wednesday along with The Wealth Report put logistics and data centres at top of the investment wish list well ahead of the living sectors.

Nevertheless, the housing metrics are on the move, even if tentatively, and investors are responding. To use the word of moment: housing is moving through an inflection point.

The small reduction in interest rates announced by the Reserve Bank of Australia during the profit season, and the positive turn in house prices during February in Melbourne and Sydney reported by CoreLogic, underlined the shift.

Andrew Schwartz, the co-founder and managing director of credit and equity provider Qualitas, told analysts that Australia was at the beginning of a housing development cycle and, in fact, was “due a super-cycle in residential”.

He did add a qualification. “We do need price growth to make development more feasible.”

Mirvac managing director Campbell Hanan noted a “strong pick up in residential sales” with a number of successful launches boosting his company’s pre-sales balance to $1.9 billion – the highest level since 2018.

Nevertheless, Mirvac forecast that its gross margin on residential sales – 19 per cent in the first half and at the lower end of its through-cycle target – would be even lower in the second half due to more settlements at “productivity-challenged” Queensland apartment projects.

Stockland managing director Tarun Gupta said the residential fundamentals were “supportive” but that the “improving interest rate environment” was needed to really boost affordability and activity.

The accompanying graphic, of Stockland’s net sale by quarter, shows a grinding recovery – and a distance still to go even to claw back to the highs of the post-COVID boom.

And for many, that so-called boom was profitless, with the damage still being felt in building industry failures.

Perhaps the strongest endorsement of the opportunities in housing came last month from Charter Hall managing director David Harrison, who told The Australian Financial Review that his group had identified the potential for 5000 apartments on land already owned and would be taking the first steps “to create a platform to grow into the living sector”.

For those who don’t have Harrison’s land bank, the tough question is where to invest in the living sector. Is it in debt or equity? Listed or unlisted? Market or affordable housing? Build-to-rent, student housing, or land lease?

Qualitas, which last year financed 10 per cent of all new apartment starts, is at the vanguard of the cycle. Investors like the story and pushed the stock up 7 per cent for the month. The group has also been at the front of the strong growth in non-bank, private credit for housing development, not all of which has shown the same returns as Qualitas.

Louis Christopher, the managing director of investment research house SQM Research, and a leading property analyst, notes the “large number of private credit products created over the past 2 to 3 years”. He recommends that investors who want to play the residential cycle through mortgage trusts or private credit should stick with “the larger, well-known operators who got through 2008”.

During the Qualitas briefing, Schwartz also noted that after several years during which credit was the way to play real estate, increasing numbers of investors now want an equity stake. At the big end of town, Lendlease, Mirvac and Stockland are taking leading funds, largely from Asia, into their projects as equity partners.

As the residential cycle gathers pace, smaller equity syndicates will no doubt emerge to play the game, though not always successfully.

At the moment, equity investors are watching the listed opportunities.

Stockland is the preferred large cap play on the residential recovery for analyst UBS and particularly well positioned with the acquisition of Lendlease’s master planned communities portfolio. However, UBS has a “neutral” rating on the stock because its price has already had a good run – with a 19 per cent total return in the year to February 28 – and because more interest rate relief, three cuts according to the USB economists, is needed to make a “material change in affordability”.

Mirvac, the other leading large cap stock with housing operations, had one of the best stock price performances in February. But that might be due to what UBS called “an improved sentiment to office” as much as to any new information on housing.

The strong growth in the land lease sector is also attracting interest.

The biggest listed player, Ingenia Communities, upgraded its outlook in December – more because of a corporate refocus than any improvement in the market – and now shows a 44 per cent increase in stock price over two years.

In the land lease sector, UBS has a “buy” on Lifestyle Communities, which is down 50 per cent in price in the past year due to widely reported criticism of its fee model and its exposure to the hard-hit Victorian market. For UBS, Lifestyle Communities has “more leverage” to interest rate cuts than Ingenia, Stockland or Mirvac but with higher risk because of “continued uncertainty over the balance sheet likely to remain until the recovery in sales becomes clearer”.