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Broker names companies to profit from Australia’s changing property prices

Perth property
Credit: Mark, Vicki, Ellaura and Mason

There is growing speculation that the Australian residential property market, a section of our economy that has just about single-handedly kept us out of a recession, has peaked and is heading lower. Now a top broker has come up with nine data points that confirm this downbeat view.

Citigroup’s latest note on the residential sector makes for sombre reading, particularly for diehards who have steadfastly held on to the view that the boom days in the residential market for Sydney and Melbourne will roll on.

The broker isn’t predicting a hard landing for the residential market, at least not yet, but given that property cycles tend to last months if not years, any turn in the cycle will mean investors must rebalance their investments now rather than later.

There are nine signs that we have already entered a downturn, according to Citigroup. The first is property price growth has flattened and all major apartment markets have experienced price drops over the past three months.

The second point is Sydney’s auction clearance rate has declined for the past four consecutive months. This is disturbing as the clearance rate in Australia’s largest city is seen as a lead indicator for price growth across the country.

Next, rebates offered to buyers by apartment developers are becoming increasingly common, while lending conditions by the banks have tightened significantly.

Apartment settlement times and conversion times are also getting longer, which is a sign that the stricter lending environment is starting to dampen demand.

What’s more, the broker noted that Mirvac Group (ASX: MGR) downgraded its FY17 residential volumes at its third quarter update to around 3,300 lots from more than 3,300 lots. It’s a minor change but it comes after a period of rising volumes.

The seventh point is that apartment pre-sales momentum is slowing, except for the luxury apartment market in Sydney, although this is a pretty small segment of the residential market.

Meanwhile, construction costs are rising faster than price growth, which doesn’t bode well for the profit margins of our developers.

Lastly, China continues to tighten capital export controls and that should concern Mirvac shareholders as Chinese buyers make up 20% of the company’s $3.1 billion in pre-sales.

These are some of the reasons why Citigroup believes Mirvac is at greater risk of a de-rating, compared with its peer Stockland Corporation Ltd (ASX: SGP).

Stockland is a safer investment in the current environment because consensus forecasts are more bullish for Mirvac and that puts Mirvac more at risk of downgrades than Stockland. Also, Stockland is not as exposed to the apartment market as Mirvac and it depends less on offshore Chinese investors as Stockland’s projects are largely geared towards first home buyers and owner occupiers.

Another developer that I like is Lendlease Group (ASX: LLC). It’s well diversified portfolio lends it protection from a downturn in the residential market, particularly apartments. The group is also actively expanding overseas and that will further diversify its risk profile.

I wouldn’t buy the stock right at the moment though as it appears to be running up against resistance and might be due for a pull back.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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