About 29 per cent of Sydneysiders spend more than 10 hours a week commuting to work, and in some suburbs only 14 per cent of jobs can be accessed within a 45-minute car trip.
The inescapable conclusion from Grattan Institute research, released this week, is that the big cities are grinding to a halt.
Now, imagine what congestion will be like in coming decades. Sydney will have an extra 1.6 million people in the next two decades and Melbourne’s population is forecast to almost double to 7.7 million by 2051, according to recent research from their respective state governments.
The solution, of course, is new road and rail infrastructure. But cash-strapped Federal and State governments are struggling to fund infrastructure projects, let alone agree on them, and the electoral cycle is having a bigger say on what goes ahead. The result: an infrastructure logjam.
I wrote about urbanisation and capital-city congestion for The Bull in July 2014 and identified National Storage REIT as a long-term play on that trend. National Storage rallied from $1.33 when the column was published to $1.61. It has further to run, albeit at a slower pace.
Chart 1: National Storage REIT
Finding exposure to the urbanisation theme is hard work. The big infrastructure-related stocks
– Leighton Holdings, Lend Lease Group, Macmahon Holdings and Adelaide Brighton – are obvious beneficiaries. But the timing of a sustained infrastructure uptick is uncertain.
Residential property stgelopers, a theme of this column over the past two years, will benefit as more people are forced to live in new housing estates in the outer suburbs, and as sustained low interest rates continue to fuel housing construction.
Investors should think differently with the urbanisation/congestion theme. National Storage REIT is a good example. It will grow as more people live in city apartments and rent extra warehouse space, and online businesses use these warehouses to hold stock.
National Storage is not cheap. Its net tangible assets per security was $1 at December 2014, meaning investors are paying a significant premium. Investors need to watch and wait for better value and buy National Storage on any price dips, for it has good long-term prospects.
It is one of the few small-cap property trusts with a growth story beyond its core properties. Urban densification, an ageing population that will increasingly downsize and need extra storage, and online retailing are driving higher demand self-storage.
The industry is ripe for consolidation. The top three players have only 25 per cent market share and there is low brand awareness and differentiation across the industry. There are also reasonably high barriers to entry as supply is constrained by locations for self-storage.
Inner-city storage facilities should be able to charge a higher premium as more people cram into cities, apartment sizes reduce, and people need easier, closer access to storage.
Fast-food consumption a winner from congestion
Another way to play the urbanisation trend is through fast-food retailers. More time in cars and trains means less time to source and prepare home-cooked meals. Also, urbanisation will encourage more people to eat out and escape their small city apartments.
Multi-franchisor Retail Food Group is a clear winner from this trend. It has some of Australia’s best franchise systems in Gloria Jeans, Di Bella Coffee, Crust Pizza and Pizza Capers. As I wrote for The Bull last year and this year, it is hard to go past coffee and gourmet pizza as long-term growth industries, particularly as urbanisation encourages eating out.
This column last month foreshadowed a strong interim result from Retail Food Group and it did not disappoint. Net profit rose 46 per cent to $25.3 million for the first half of FY15 and the share price spiked almost $1 on the news. It was a cracking result from a high-performing company.
Like National Storage, Retail Food Group looks dear on traditional valuation metrics. But it can grow fast enough to justify a higher valuation, although a share-price consolidation or pullback is due after the strength of recent gains. That could be a buying opportunity.
Chart 2: Retail Food Group
More car time means higher costs
The third beneficiary of capital-city congestion is Burson Group, a column favourite. People living further way from their work means more time spent commuting, more kilometres, more wear and tear, and more money spent on servicing cars. The same could be same of the listed panel beater, AMA Group, as longer commutes, sadly, lead to more car damage.
Burson Group has a terrific business: its huge network of suppliers and distribution centres means it can supply parts fast enough to allow workshops to service them on a same-day basis. I wrote about Burson Group at $2.18 for The Bull in July 2014. It is now $2.70 and looks a worthy small-cap stock for investors who can hold it for several years.
Chart 3: Burson Group
Critics might contend that urbanisation/congestion is a well-known theme and that it is too long a bow to link it to National Storage, Retail Food Group and Burson Group. Companies should always be judged on their merits, not bought only on the basis of top-down trends. But the ageing population and its incredible effect on quality healthcare providers shows the gains that can be made by finding companies pushed higher by powerful trends.
Long-term investors, such as Self-Managed Superannuation Funds, should consider key trends that will take decades to play out and find high-quality small- and mid-cap stocks that can benefit, within a well-constructed, diversified portfolio.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at March 4, 2015.