A friend complained about his living arrangements. He and his wife are sick of renting rather than owning a property and having to move when their lease expires.
Young families struggling to break into the property market is hardly news. What struck me was my friend and his wife have professional jobs and earn a decent salary, yet are unable to save enough for a house deposit. They face a lifetime of renting.
Of course, jumping on the property ladder depends on one’s lifestyle preferences. My friends could afford to buy in a cheap outer-ring Sydney suburb. But they prefer an inner-city location closer to work. Even middle-ring suburbs have moved beyond their price range.
They are not alone. Sydney’s median house price of just under $1.2 million is beyond many first-time home buyers. I emphasise the median price, because most inner-city houses are worth much more than that. Even the median price requires a deposit of $240,000 (assuming 20 per cent equity required by banks) and a whopping loan of $960,000.
A typical Sydney home will cost $2 million by 2028 if price growth over the next decade matches the previous one, according to Finder.com.au. I doubt that will happen, but it’s a good bet that houses will become even less affordable for young people next decade.
Record-low wages growth, workforce casualisation and lower job security will make it harder for young families to secure and repay larger slabs of debt. Meanwhile, strong migration and population growth in Australia will support high house prices in the long term.
The inevitable result is more people, like my friend and his wife, being lifetime renters. Almost one in three Australians now rents, the latest Census showed. Home ownership has been in decline for almost three decades, the Grattan Institute reported last year.
This megatrend will have far-reaching consequences for society for many years – and be a lucrative tailwind for Australian companies directly exposed to “Generation Rent”.
A gradual reduction in home ownership and increase in the proportion of people who rent will change spending patterns, create a more flexible workplace, pressure outer-ring suburbs that offer better housing affordability and drive new infrastructure development.
The obvious way to play Generation Rent is through companies that provide services in this market. But other industries indirectly benefit: online travel-agent stocks have boomed in recent years as younger people spend more time and money on overseas holidays.
Funny how not being a slave to a giant home loan frees up money for holidays and other products and services. Renters are missing out on the wealth creation that comes with home ownership and paying down debt, but some Millennials do not seem to care.
Two stocks to watch
National Storage REIT and Updater Inc are my two preferred plays on Generation Rent. Domain Australia Holdings looks interesting on valuation grounds and as it offers more property services. However, a softening property market could weigh on its share price.
National Storage REIT, a self-storage operator, listed on ASX through a December 2013 float. The 98-cent issued stapled securities rallied to $1.87 in mid-2016, before easing to $1.40 earlier this year. The Australian Real Estate Investment Trust now trades at $1.73, having rallied in the past few weeks without any major news. I have written favourably several times about National Storage for The Bull in the pats few years.
Chart 1: National Storage REITSource: The Bull
My interest in National Storage is two-fold. First, demand for storage space will rise as more people live in smaller rental apartments and need extra space. Second, the self-storage industry is highly fragmented with many private owners and is ripe for consolidation.
National Storage is not cheap, trading above its latest net tangible assets. But it has better growth prospects than most small-cap AREITs, in part due to a business model that owns and manages self-storage facilities. Self-storage REITs have been popular overseas.
Shares in Updater Inc, a consumer-relocation technology company, have soared from a 20-cent issue price in its float to $1.10, making it one of the market’s hottest small-cap stocks. Updater raised $22 million at 20 cents and listed on ASX in December 2015.
Chart 2: Updater IncSource: The Bull
The New York-based Updater is a play on relocation trends in the United States. Its Mover Product, free for users, provides movers in the US with a centralised online service to organise and complete relocation-related tasks.
Updater also allows real-estate agents to provide personalised moving services for clients and for businesses that provide home-removal and other relocation services to access this market. It’s a valuable service for people who are moving regularly between houses.
Updater in February 2018 reported revenue growth of 287 per cent to US$2.2 million for 2017. It forecasts revenue of US$19-23 million for 2018 – remarkable growth, even by emerging tech-company standards. Updater had almost US$50 million in cash and no debt.
There’s a lot to like about Updater. The company reported 18 per cent penetration of the US rental market after processing 2.36 million moves last year It projects 35 per cent market penetration.
Updater says average US households spend US$9,000 during the move lifecycle and are four times likelier to try new brands during a move – a lucrative market for companies trying to reach such consumers. Decisions worth billions of dollars, such as choosing new utilities, pay TV or insurance providers, are collectively made within six weeks of a move, says Updater.
Like other higher-growth tech stocks, Updater is hard to value. The Australian market values the loss-making company at $600 million. Updater directors sold $18 million shares in May 2018, reportedly to allow another large investor to join the share register. Directors selling stock in emerging tech companies can be a sign that insiders believe the stock is overvalued.
Experienced investors who are comfortable with higher-risk small-cap stocks should watch and wait for better value with Updater. After the stellar rally in the past 18 months, a longer period of share-price consolidation (sideways movement) is likely.
Updater needs to hold support above $1. A decisive break below that could signal further falls, while a break above $1.40 could mean the next leg of Updater’s rally is beginning.
Either way, Updater is building a powerful position in the US relocation market, which like Australia will benefit as more people are forced to rent and move house more often compared to previous generations.
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at July 10, 2018.