Economic growth may be picking up but don’t expect the bulls to come charging back into the property market. If anything, stocks exposed to the residential market are likely to face challenging times even if the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) can power ahead through to 2019.
This means potential profit warnings from some of our large cap names and UBS is jumping the gun by sounding a warning bell on apartment builder Mirvac Group (ASX: MGR).
The broker has downgraded the stock to “sell” from “neutral” and cut its earnings estimates on the stock after making a similar move on Stockland Corporation Ltd (ASX: SGP).
While Mirvac won’t be the only one feeling the heat from a retreating housing market as we also have Lendlease Group (ASX: LLC) involved in Australian residential property developments, Mirvac is potentially at the coalface of the slowdown due to its large exposure to property investors and the Sydney market.
These are two areas of the residential market that are most under stress at the moment as Sydney is leading the house price declines across Australian capital cities, while investors are beating a hasty retreat as banks appear reluctant to lend to this group.
What’s more, Chinese investors (a group that has arguably contributed the most to skyrocketing Sydney home prices) have been hit by restrictions on taking money out of China by their communist government.
“When we downgraded Mirvac to ‘Neutral’ in February we noted the difficulties residential REITs historically face in a falling house price environment. Conditions have since deteriorated further,” said the broker.
“We also investigate what a credit tightening means for different buyer segments and geographies. We find Mirvac’s best customer, the investor, and best market, Sydney, are likely to be most impacted.”
Investors account for 40% of Mirvac’s total sales and New South Wales represents 37% of the group’s forecast sales.
The near-term impact of a slowing housing market on Mirvac will be small given that the group has pre-sold many of its properties.
However, if the housing market downturn persists for over a year (something I think is a very real possibility), then Mirvac can’t escape a consensus downgrade.
UBS has cut its earning per share (EPS) forecast on the group over the next three years and its estimates are below consensus forecasts by between 2% and 10%. The broker has lowered its price target on the stock to $2.16 from $2.26 a share.
The good news is that a number of sectors on our market are likely to power ahead as yesterday’s better-than-expected GDP figures show our economy is powering up.
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Motley Fool contributor Brendon Lau has no position in any of the 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 Scott Phillips.