How ASX investors can position for the next ‘construction boom’ in Aussie real estate
Link copied to
Did someone say construction boom?
After a few years of slow or sideways growth, house prices in Australia are rising again – fast.
Housing finance data from the ABS last week showed new lending approvals surged ahead in December.
The approvals process to build new houses typically slows down into the end of the year, but not this time.
Data yesterday showed building approvals jumped by 10.9 per cent, against a forecast rise of just three per cent.
More broadly, CBA reckons Australia’s economy is now on track for a V-shaped recovery.
Also, borrowers don’t have to worry about interest rates. They got slashed to (almost) zero to combat the pandemic and are expected to stay there.
And it’s on that front that Stockhead kicked off our chat with pro investor Heath Moss, in the wake of the RBA’s latest rates announcement yesterday.
“We got a couple of surprises. The market didn’t really expect them to flag an additional $100bn of bond purchases (QE) once they finish the current cycle in April,” Moss said.
The RBA also made a subtle but important shift in its language around the rates outlook.
Instead of forecasting rates to stay on hold for “at least three years”, the bank was more direct; it doesn’t expect to raise rates “until 2024 at the earliest”.
“If they changed the language without the additional $100bn of bond purchases, longer dated yields could have run and run hard, and the AUD could have run higher as well,” Moss said.
It probably also helped cap gains on the currency, although “I still see the Aussie going past 80c this year”, he said.
“Buying is supportive of asset prices — housing and the stock market,” he said.
“Loan approvals and construction approvals are all going through the roof, so it does look like we’re headed for a construction boom and robust housing conditions.”
“I’m of the opinion Australia is in for a really strong 3-5 years – a domestic-led recovery with housing and infrastructure spending, all backed up by the commodities super-cycle.”
“Throw in an extra bit of fuel on the fire with the RBA’s bond buying this year and I think it’s shaping up pretty well.”
So, are there any trading strategies for ASX investors to hitch a ride to a surge in housing and construction?
Moss reckons that as the economy emerges from the pandemic, the rebound in discretionary retail will continue into 2021.
He noted that Australian households are cashed up, while “a lot of people who lost their jobs have returned to work”.
“They’ve got that buffer there to spend discretionary income on whatever they please, and I think retail will be the beneficiary,” he said.
“On top of that you’ve got the housing construction boom, which is being led by first-home buyers. People that build a new house want to fill it with nice things – furniture and white goods.”
In response, Moss said he’s allocated a large position to Harvey Norman (ASX:HVN), which hasn’t always been an investor favourite in recent years.
“I think it looks really cheap even now with their recent rise. It’s trading at about 12x forward earnings with a 6.5pc dividend yield. I think they’ll outperform earnings wise and that (dividend) yield may be bigger again,” he said.
He’s also allocated money to Super Retail Group (ASX:SUL) – parent company of brands such as BCF and Rebel which offer “great exposure to reopening economy”.
“And I love Temple & Webster (ASX:TPW), I thought their numbers were fantastic. Their stock came off a little bit yesterday (after the H1 results) so it was probably a little bit baked in.
“But it’s a niche area, an under-represented area online in furniture and homewares. Their free cash flow is great and the overall model is fantastic.”
Moss said he also “got a lot more exposure to Bluescope Steel (ASX:BSL)” – a bet that the next phase of Australia’s construction boom will drive strong demand.
“They’ve got customers here and in the US, which is experiencing a similar sort of boom in housing that we are,” he said.
“Steel prices in Asia have been supportive as well, and they’re still only trading at around 11/12x forward earnings.”