Is it time to buy construction stocks?

The HIA New Home Sales report, a survey which includes data from Australia’s biggest builders, showed that total new home sales increased 1.6% in May 2013. This comes as last weekend, Victoria saw a spike in auction rates as first-time home buyers took advantage of the state governments grant on existing homes.

HIA chief economist Harley Dale says that, “it is pleasing to observe upward momentum in new home sales continuing, especially given the low depths plumbed in 2012”. However, Mr Dale has also said that whether or not the upwards trend can be sustained is another question.

“The key is whether a new home building recovery can be sustained, and at a growth rate sufficient to meaningfully assist the Australian economy with its rebalancing acts”. The 1.6% increase took monthly sales back to levels not seen for 18 months.

The best performers have been homes for investors buying in the three mainland states of New South Wales, Victoria and South Australia but multi-unit sales surpassed detached housing rates and grew at a rate of 5.7%. Detached house sales in Queensland and Western Australia fell by 2.2% and 10.3%, respectively.

According to HIA, the results suggest that Australia has experienced a modest growth in construction of residential homes in 2012/2013 and Mr Dale believes the trend is “set to carry into the fresh financial year”.

For shareholders in Australia’s top residential developers like Peet (ASX: PPC), Lend Lease (ASX: LLC) and Mirvac (ASX: MGR), the news couldn’t be coming at a better time.

In the first half of FY 2012, Peet declared NPAT of only $1.2 million and cited tough market conditions and an ongoing management strategy as the catalysts for the massively reduced profit. However, the company is optimistic since it recorded positive settlements and sales and expects, with new projects and additional production scheduled for 2014, it will increase its NPAT. However, with a P/E of 31 and operations in both Queensland and Western Australia, investors will may have reason to be cautious.

Mirvac has also been through a rough patch and operates solely in Australian markets that have been sluggish in recent years. However, the company cited US and European debt crises as the reason for funding costs remaining higher than usual. With first half NPAT down 69%, the news of increases in new home sales will be music to shareholders’ ears. With a renewed focus on core business activities, Mirvac is going back to what it’s good at — property investment and development — and with interest rates expected to drop, it could be perfect timing.

Conversely, Lend Lease has managed to thrive in the past year, and in the last six months has increased NPAT by a huge 38%. It credits the increase to its commercial properties in Sydney, namely its first two commercial towers at Barangaroo South. In addition, management has previously set an EPS growth target of 10% per year and pays a healthy dividend of 4.8%. The diversified business model has enabled it to be flexible and remain competitive in the slowdown of housing sales but if we see growth continue, it will stand to benefit.

Foolish takeaway

Seasoned investors know how to value  quality businesses and create a portfolio with a healthy mix of companies that can be considered growth, core and income. Diversifying your portfolio is an effective means to sustain your wealth and take advantage of gains in different industries while generating healthy revenue from high-yielding stocks. Property stocks are renowned for high yields, but finding one with a healthy balance sheet is vital. A good balance sheet gives companies in competitive environments room to move when times get tough and allow you to sleep at night. Keep an eye on property stocks as no doubt governments at all levels will look to stimulate the industry in order to adjust the economy away from the resources sector.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.  

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