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3 stocks for the real estate boom

Growth in property prices stalled for a few years in the aftermath of the global financial crisis as households and individuals sought to avoid debt and pay of existing loans.

Residential property prices rise if the number of household formations is greater than the number of new dwellings built. However, low interest rates and the ability for SMSFs to invest in property further increase demand for property, both residential and commercial.

1. Tamawood (ASX: TWD) offers exposure to the residential real estate market in Queensland. Tamawood sells designs for houses, and manages their construction. Its activities are not capital-intensive, as the company receives cash upfront. Tamawood also charges fees to affiliated builders for licensing and franchising and  in the last two years has made over 20% of its revenue from installing solar panels and trading renewable energy certificates.

Tamawood has performed well over the last decade. However, the earnings are cyclical, and the share price has climbed over 30% since June. Investors need to be wary of buying such stocks when they are at the top of a cycle. However, for those who think house prices are about to boom, Tamawood is a strong candidate.

2. Mortgage Choice (ASX: MOC) has a recognisable brand and allows would-be borrowers to compare the offerings of over 20 different lenders. As the property market picks up, new borrowers are likely to consider using their services. As house prices increase, so too does the commission earned by Mortgage Choice; this is definitely a stock for a hot real estate market.

Macquarie Group (ASX: MQG) has been increasing its exposure to the domestic mortgage market, and Mortgage Choice is one distributor of its loans. This is good news for the broker, as it benefits from healthy competition between lenders. Macquarie’s entry into the domestic mortgage market has encouraged the big four banks to offer discounted rates through mortgage brokers.

Commonwealth Bank (ASX: CBA) is the leader when it comes to domestic mortgages, with over 25% of the market. As has been widely reported, Commonwealth has been selling more mortgages through brokers such as Mortgage Choice. While this hurts the bank’s margins, it’s good news for the broker. As with Tamawood, the share price of Mortgage Choice is up about 30% since June.

3. Servcorp (ASX: SRV) is a different kind of property play (and one that I prefer, at current prices). The company owns serviced offices throughout the world, and differentiates itself from the competition by providing a high level of service. For example the company can provide receptionists, IT support, VOIP networks and super-fast internet to all its clients.

In particular, Servcorp’s success in the short term will depend on the company filling its new offices in the United States. In FY 2013, Servcorp reported an increased profit from mature floors and a decreased loss from immature floors. Motley Fool contributor Peter Andersen covered the company recently in this excellent article. Investors should note that part of Servcorp’s improved profit in FY2013 was due to a reduction in the depreciation rate the company uses.

Foolish takeaway

It’s always a good idea to think about how long-term trends will impact a company. However, investors should avoid buying into the ‘hot’ sectors when the hype is high. These three companies are among the best for exposure to real estate, but that doesn’t mean you should buy them at current prices.

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Motley Fool contributor Claude Walker owns shares in Servcorp. Find him on Twitter @claudedwalker.

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