Reopening of Borders Might Boost the Real Estate Ecosystem – 3 Stocks to Consider

I. Sector Landscape and Outlook

As per the Reserve Bank of New Zealand’s (RBNZ) ‘Financial Stability Report’ May 2022, the current mortgage rates and government policies have reduced housing demand. The government has taken initiatives to control inflation, stabilise long-term inflation expectations, and adjust wholesale interest rates per the market. Interest rates on new mortgages have grown that will be embedded into the stock of existing mortgages as they are re-fixed. However, improved construction indicates that the supply imbalance resulting in house price inflation over recent years is easing. Nationwide residential building consents are at record high levels in anticipation of future demand revival.

House Prices are Now Headed Toward a More Sustainable Level

As per RBNZ, the house prices have decreased by ~5% since their peak in November 2021, towards more sustainable levels. Though the market is cooling, the house prices remain above the pre-covid levels justified based on their economic fundamentals like the supply of houses, yields from rents, the opportunity costs of other investments, the tax treatment of housing, and interest rates.

Exhibit 1: Trend in House Prices

Data Source: This work is based on/includes rbnz data which are licensed by rbnz.govt for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Analysis by Kalkine Group

Rise in House Lending Continued in May 2022

Exhibit 2: Rise in Lending Continues in May 2022 – Banks and NBLIs

Data Source: This work is based on/includes rbnz data which are licensed by rbnz.govt for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Index Performance:

The S&P/NZX All Real Estate (Sector) Index generated a 5-year return of ~46.25% versus ~41.15% by the S&P/NZX 50 Index. Therefore, NZX All Real Estate Index overperformed NZX50 Index by ~5.1% in 5-year.

Exhibit 3: S&P/NZX All Real Estate (Sector) vs S&P/NZX50 Index

Source: REFINITIV

Key Risks and Challenges:

As per RBNZ, the rise in the interest rate and fall in house price could result in a large decline in construction-sector activity. This could lead to more developers applying for insolvencies and many incomplete or cancelled projects. This would result in a profound fall in residential investment and present downside risks to the outlook of housing prices. Further, the elevated inflation level in many advanced economies and tightened labour markets led central banks to formulate policies that would impact the growth outlook and affect investor sentiment. Meanwhile, house prices are projected to decrease by ~9% from the end of 2021 to mid-2024, towards more sustainable levels. Falling house prices would slash household wealth and weigh on consumption.

Exhibit 4. Key Risks in Real-Estate Sector:

Source: Analysis by Kalkine Group

Outlook:

As per RBNZ, from August, the Government’s new Medium Density Residential Standard zoning regulations will push development capacity in New Zealand’s major cities, on top of previously announced changes to planning regulations. Further, the construction and other housing-related prices have contributed most to non-tradables inflation, indicating both stronger-than-expected underlying demand by Kiwis and shortages of labour and building materials.

The growth in residential building consents has levelled off, led by falling consents for standalone homes. Data for May 2022 indicates residential consents fell 0.5% in May 2022 from April 2022, after falling 8.5% in March 2022. Consents are likely to ease as construction costs rise and house prices fall.

Meanwhile, it is anticipated that reopening the NZ border and international borders could result in a return to a net inflow of migrants into NZ over the next two years and have a favourable impact on real estate demand ahead of supply capacity.

Apart from the sector-specific factors, we have also analysed three NZX-listed companies operating in the same sector. This report covers their insights, outlook, performance and potential as expected to be delivered in the near to medium term.

1) Kiwi Property Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$1.59 billion, Annual Dividend Yield (TTM)¹: 7.06%)

Business Description:

Kiwi Property Group Limited (NZX: KPG) invests in New Zealand real estate. The Company's primary assets are investment properties, and its reportable segments are Mixed-use, Retail, Office and Other.

Outlook

The company made significant progress on its Sustainability Strategy in FY22 and constantly working to support well-being in the country, drive business value and create a brighter future. The focus area for FY23 will be to launch the CBD office co-investment platform, progress well on the Sylvia Park BTR and 3 Te Kehu Way developments and manage its assets towards growth. 

Valuation Methodology: Price/Earnings Per Share Based Relative Valuation (Illustrative)

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

The stock has been valued using a P/E multiple-based illustrative relative valuation, and the target price so arrived reflects a rise of low double-digit (in % terms). Accordingly, a slight premium has been applied to P/E Multiple (NTM) (Peer Average), considering a diversified revenue stream.

Considering the above factors, a ‘Buy’ recommendation on the stock has been provided at the closing market price of $1.015 per share, up 2.01% as of 14 July 2022.

2) Argosy Property Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$1.09 billion, Annual Dividend Yield (TTM)¹: 5.54%)

Business Description:

Argosy Property Limited (NZX: ARG) is involved in investing and managing properties, including office, industrial and retail properties across New Zealand.

Outlook

A sound balance sheet and low gearing offer flexibility to fund green developments and strategic prospects. The emphasis in FY23 will be on delivering healthy operational results, meeting key expiries, leasing up outstanding vacancies, finishing the key green developments, and starting fresh ones. Forecast FY23 dividend guidance stood at 6.65 cents per share, an increase of 1.5% on the prior year.

Valuation Methodology: Price/Earnings Per Share Based Relative Valuation (Illustrative)

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation

The stock has been valued using a P/E multiple-based illustrative relative valuation, and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to P/E Multiple (NTM) (Peer Average), considering its sound capital position, decent portfolio and foundations for the current year and beyond, and decent property fundamentals in critical markets.

Considering the above factors, a ‘Buy’ recommendation has been provided on the stock at the closing market price of $1.285 per share, up 1.58% as of 14 July 2022.

3) Stride Property Ltd & Stride Investment Management Ltd (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$934.77. million, Annual Dividend Yield (TTM)¹: 6.86%)

Business Description:

Stride Property Ltd & Stride Investment Management Ltd (NZX: SPG) consists of Stride Investment Management Limited (SIML) and Stride Property Limited (SPL). SIML is an investment manager and staff employer for the group company, and SPL owns the property portfolio and has an ownership interest in each Stride portfolio.

Outlook

The focus is on the prospects for setting up Fabric as a separate Stride Product. The company plans to invest $232 million in the growth development project, with a balance sheet capacity of over $250 million. Besides, the company’s Boards confirmed that they are targeting a combined cash dividend per share for SPL and SIML for FY23 of 9.91 cps.

Valuation Methodology: Price/Earnings Per Share Based Relative Valuation (Illustrative)

Technical Overview:

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation:

The stock has been valued using a P/E multiple-based illustrative relative valuation, and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to P/E Multiple (NTM) (Peer Average), considering the uptick in net rental income in FY22 and impressive future development pipeline with $130 million of active projects committed and a future pipeline of over $175 million across the Stride Products.

Considering the above factors, a ‘Buy’ recommendation has been provided on the stock at the closing market price of NZ$1.73 per share, up 1.17% as of 14 July 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 3:  Annual Dividend Yield is on a Trailing Twelve Month (TTM¹) basis and are subject to change based on factors such as company performance, stock price changes, etc.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level at which the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: In general, it is a level to protect further losses in case of any unfavourable movement in the stock prices.

Disclaimer

Kalkine New Zealand Limited is authorised to provide general advice only. The information on this website does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.