This week the Australian Bureau of Statistics (ABS) released residential building approval figures for March. Despite registering a 3.5% fall in seasonally adjusted terms, the overall level of approvals is still at a multi-year high which suggests the outlook for new home construction is strong. Indeed, as the Housing Industry Association declared "building approvals still paint a rosy picture."
What's the best way to gain exposure to this trend?
While building material suppliers such as Boral Limited (ASX: BLD), CSR Limited (ASX: CSR) and Fletcher Building Limited (Australia) (ASX: FBU) might be the types of companies investors first think of when it comes to gaining exposure to the building boom, in reality investors needed to act on this 12-months ago. In the past year these three stocks have each provided impressive gains of between 20% and 83% to shareholders, and arguably most of the future growth in their earnings is already priced into their share prices.
However there are in fact a number of different ways to gain exposure to the home building sector. These include the fittings and later stage home suppliers such as paint manufacturer DuluxGroup Limited (ASX: DLX) and bathroom fittings manufacturer GWA Group Ltd (ASX: GWA), which owns well-known brands including Caroma and Dorf. While Dulux has already gained 30% in 12-months, GWA is up just 6% and is trading on a FY2015 price-to-earnings ratio of 13.8.
Based on valuations it could be even more appropriate to invest in property developers which stand to benefit from homeowners looking to buy home and land packages within residential communities. In this sector there are a number of providers including AV Jennings Limited (ASX: AVJ) and Devine Limited (ASX: DVN), however the larger Stockland Corporation Ltd (ASX: SGP) could be a safer way to invest in this cyclical sector.
Foolish takeaway
While early investors have already snared much of the upside to valuation from the coming boom in home building, there's no telling how high the market may send these stocks. Based on fundamentals it is arguably too late to buy many of these stocks and still expect to enjoy significant upside.
For investors looking to gain exposure you will need to seek out companies which the rest of the market has overlooked – GWA could be worth investigating. Alternatively buy into the very best companies which you know can ride out the cycle such as Reece Australia Limited (ASX: REH) and Brickworks Limited (ASX: BKW).
