With the release of Stockland’s (ASX: SGP) annual report, we see not only that are revenues are down 23%, but a write-down of property inventory of $367 million, that took net profit down 78% for the year.
Before 2008, Stockland was actually marking inventory up during the 2000-2007 housing boom — $837 million in 2007 alone. When the GFC came, it was slammed for $1.34 billion in value adjustments and write-downs. The housing bubble popped, and real estate prices had to be whittled down to real value. This is still going on.
The stock market reacted lightly, trading a little up and down before and after the announcement, but no major sell-off. Stockland’s share price is trading at about its book value and net tangible asset value. The same is true for Australand (ASX: ALZ) and GPT Group (ASX: GPT). They have been in trading ranges since 2011, slowing arching up, but not breaking through.
During this quiet time, there had been talk of Stockland buying out Australand recently, and in December 2012 GPT did make an offer for the commercial properties divisions of Australand, but was turned down. Stockland’s construction is 55% residential, Australand is 31%, and GPT is only commercial and retail.
A housing boom would affect Stockland the most. Looking back at the 2000-2007 bull market, Stockland almost tripled in share price. Australand almost doubled, but it was a shaky up-and-down ride as housing went up and commercial property went sideways. GPT doubled smoothly.
Property is cyclical in nature. Builders don’t have the option of turning out a new product that grabs the market’s attention, rocketing their share price up. They are more like the US auto industry, where there are as many up years as down years.
Peter Lynch, a famous US fund manager, loved this cyclical nature once he understood it. When people weren’t buying cars, they still wanted to buy them, so the demand was pent up — building up pressure. Once the market and general economy picked up, the buying came out in droves.
He wrote that when the auto industry was depressed, he would wish for another bad year so that when he bought into the car companies, they were dead cold, and from there he made his money when the industry finally turned the corner.
A house is much more expensive than a car, so consumers’ purchasing cycles are much longer. During the downtimes, companies consolidate by cutting down costs and asset values, buying each other out and position themselves for the next leg up.
Investors have to know the cycles and seasons of the industries they buy into. If you just buy the hottest current stocks, you will have to pay a premium for them. Value investors will want to buy them when the market discounts and doesn’t want them. As they say in real estate, “half of your profit is in the purchase price”.
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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.