The share price of apartment builder Mirvac Group (ASX: MGR) has performed well over the past few months but the stock is struggling to climb any higher as ongoing worries of an apartment glut in the major cities, particularly Melbourne, is dogging the stock.
This risk factor is offsetting the relatively upbeat outlook given by management during last month's reporting season and that has helped push the stock up nearly 9% since the start of the calendar year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has only managed a 1.2% gain.
But the stock appears to have hit a major resistance level at around $2.32 as it has tried and failed five times to break above $2.35 this year alone.
However, investors may not have to wait much longer for an excuse to take the stock to a higher level if predictions from research firm BIS Oxford Economics comes to pass.
According to the Australian Financial Review, BIS has done an about turn to become an apartment building bull as it is forecasting a near-term shortage of apartments in Melbourne.
While the market may not share that sentiment right now with downward pressure on house prices, investors will start to feel the squeeze as soon as 2018, said BIS.
This finding stands in sharp contrast to BIS' forecast two and a half years ago when it predicted a 15,000-apartment glut in Melbourne – a warning it repeated only last year. BIS is now predicting a 2000-unit undersupply next year.
An unexpected surge in student numbers is the key reason for the change in BIS' forecast with census figures showing Victoria had 109,000 more people than previously thought. This translates to around 35,000 extra households. Students tend to be concentrated in the CBD or close by and favour apartments to houses.
Mirvac isn't the only ASX-listed housing developer that stands to benefit from any surge in demand for apartments. Lendlease Group (ASX: LLC) and Stockland Corporation Ltd (ASX: SGP) are also exposed to this segment, although Mirvac has the most to gain as it is more focused on apartment development than its peers.
However, I don't think one should assume any undersupply will automatically lead to higher prices. Tighter lending criteria for overseas investors (we are talking about parents of international students) and capital controls imposed by China (where most international students come from) will create high barriers for further price increases.
Regardless of how acute the undersupply is, prices will likely be capped by the ability to pay.
On the other hand, what this tells me is that we shouldn't expect big price falls either barring a Black Swan event.
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