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Fresh cracks in the Sydney property market weigh on building stocks

The share price of Brickworks Limited (ASX: BKW) crashed after it released its full-year results which gave investors new reasons to worry about the health of the residential market.

The stock tumbled 3.3% to $16.53 in early trade, making it the worst performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) at the time of writing.

Management posted a record underlying net profit of $223.7 million, up 14% from the prior year, and lifted its final dividend by 6% to 36 cents a share, but investors couldn’t hide their disappointment over its FY19 outlook.

The managing director of the construction products and investments conglomerate, Lindsay Partridge, tried to reassure investors that fundamentals for new housing construction remains positive but accused the banks of holding back the market.

Tighter lending controls from the likes of Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) are causing delays and cancellations of dwelling construction.

“As a result of these delays and cancellations, we are currently experiencing patchy sales, despite our strong order book in the major east coast markets,” said Partridge.

“Weakness is evident in businesses exposed to the multi-residential market in Sydney. Elsewhere, demand is being supported by the continued resilience of the detached housing market, and strong activity in regional centres such as Newcastle and Wollongong in New South Wales and Geelong in Victoria.”

But Brickworks (and probably the wider sector) is facing rising cost pressures. The group noted a shortage of tradespeople in some states like Victoria and Tasmania while higher energy prices will take a significant bite out of the group’s Building Products division from the start of the new year.

Brickworks won’t be able to pass on all of the higher costs or find enough ways to cut costs to offset the pressure.

Western Australia also continues to be a difficult market and the wet winter has only further dampened demand for housing in that state.

If Brickworks is to deliver growth in FY19, the gains will need to come from its property portfolio and its investment returns. I think investors aren’t willing to bank on this at the moment.

Shares in other building products companies like CSR Limited (ASX: CSR) and Boral Limited (ASX: BLD) are also under pressure this morning.

Partridge’s comments on Sydney’s multi-dwelling property market is also probably weighing on the share price of apartment builder Mirvac Group (ASX: MGR).

Unless companies have a material exposure to infrastructure construction or the US market, like Boral, I would be avoiding the sector until the dust settles.

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Motley Fool contributor Brendon Lau owns shares of Boral Limited and Westpac Banking. The Motley Fool Australia has recommended Brickworks. 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.

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