This column presented a bullish view on property-related stocks earlier this year. The logic was simple: record low interest rates and the prospect of another rate cut this year, possibly two, would lift property prices and residential property-related stocks.
So far, so good. The national median house price rose 1.7 per cent in the first three months of 2013, according to a report last month from Australian Property Monitors. RP Data-Rismark’s home value index showed a slight price decline across capital cities in April, but the trend is up.
The best indicator, auction clearance rates, continues to climb. In late April, Sydney’s auction rate soared to 75 per cent and Melbourne’s hovered in the mid-60s. That is despite the cooler autumn months typically starting to weigh on sentiment, clearance rates and home sales.
One needs to put recent modest property price gains in perspective. With so much economic uncertainty and a looming federal election, residential property buyers could be forgiven for waiting until the traditionally stronger spring. But not even a daily diet of negative headlines can dent demand.
I expect another interest rate cut in July and possibly a second later this year. Lower rates and the prospect of a new Federal government in September will boost consumer and business confidence. Median property prices will rise, although more modestly than in previous cycles.
That scenario will lift demand for property-related information, advertising, and related goods such as furnishings. Companies that provide them could have a stronger tailwind in 2013, and deliver better-than-expected earnings and higher share prices. They are worth a look.
The market star, REA Group, is the obvious place to start, but it looks fully valued after stunning share price gains in the past year. Internet stocks such as REA, Seek, Webjet and Carsales.com are best bought during sharemarket corrections when they offer better value.
In this column in March I alerted readers to Nearmap, a new player in the property information space. Its main asset, nearmap.com, provides high-resolution photos of Australian property and licenses it to government agencies and private companies through subscription. I wrote: “Nearmap remains under the radar despite rallying from a 52-week low of 3 cents to 11 cents.” Nearmap has since soared to 27 cents.
Paradice Investment Management – one of the market’s best judges of small and mid-cap stocks – emerged as a substantial shareholder in Nearmap in late April. The $84-million Nearmap is clearly speculative, but looks a neat acquisition for a larger property information provider.
Another small property information provider, Onthehouse Holdings, was also identified. It provides data in addition to listing information, and should benefit as online property advertising eventually moves from classified advertising to performance-based revenue models.
As Nearmap rises, Onthehouse has fallen from 70 cents in March to 55 cents. ASX queried the fall in mid-April and Onthehouse said: “It is possible that the recent trading is speculative in nature and based upon interpretation that no arrangements have at this stage been announced.”
The market is waiting for Onthehouse to announce news about advertising deals from banks and financial service companies and the provision of data to them. It said the delays may impact revenue for this financial year by up to 5 per cent – enough of a reason for selling to accelerate.
Onthehouse’s underlying trading performance is solid and it is not hard to envisage higher demand for its automated property valuation reports if the residential housing market continues to strengthen. It, too, should be considered speculative, but price falls have improved value.
Portfolio investors who avoid micro-cap stocks should consider the key furniture stocks, Nick Scali and Fantastic Holdings. Both look fairly valued after share price gains in the past year, but should have a prime spot on portfolio watchlists in anticipation of improving value.
As we enter May, seasonally weak for sharemarkets historically, and as recent gains in the US set its sharemarkets up for an inevitable pullback or correction, better value could emerge in the next few months. Any significant pullback in Nick Scali or Fantastic would provide a buying opportunity.
Another option is Sunland Group, the Queensland-based property stgeloper. The south-east property market is clearly picking up, judging by recent price gains in previous problem markets, such as the Gold Coast. Contrarians could do worse than bet on a recovery in Queensland property.
Come spring, I suspect the market will pay even more attention to residential property-related stocks and sift through those that have lagged the rally, such as Onthehouse. Don’t expect the property bull market of recent cycles – prices are already high and consumer debt levels can only stretch so far. But the odds favour a property market surprising, rather than disappointing, this year. And further gains in property-related stocks.
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Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at Feb 14, 2013. The author implies no stock recommendations from the above commentary. Readers should do further research or talk to their financial adviser before acting on themes in this article.