House Prices: Is Revival for Property Stocks set to be seen ahead?

Summary

• As per the latest update, housing values fell by 0.7% in June after a 0.4% fall in May, but market activity has improved.
• The drop in home values has been mild due to significant government stimulus, low-interest rates, scarcity of advertised supply and mortgage repayment holidays on offer.
• The rise in coronavirus cases, as well as withdrawal of government stimulus, could act as key risks to housing prices.
• Charter Hall and Mirvac shares have provided positive returns of by 85% and 26%, respectively between hitting March lows to recording high prices on 17 July.
• Lately, Charter Hall’s CPIF and another CHC run international institutional partnership have each acquired a $207 million industrial property in south-west Sydney from Qube Holdings.
• Mirvac Group is due to pay 3 cents per stapled security for the year ending 30 June 2020 on 14 September 2020, and the Group’s residential division has a pipeline of 27,551 lots with an end value of $13.9 billion.

The impact of COVID-19 has been milder on property market than expected. Home values have been flowing at a low level, but not totally collapsing, while transactional activity has rebounded after plunging down in April. The partial strength in values can be attributed to the presence of mortgage repayment holidays, as well as significant amount of government stimulus.

As per the property market consultant, CoreLogic’s report, housing values fell for the second consecutive month, with the national index falling by 0.7% in June after a drop of 0.4% in May. The dwelling values declined by 0.8% across the nation in the June quarter driven by a 1.1% drop in values across capital cities.

Source: CoreLogic

According to property consultant’s research head, the downward pressure on home prices had stayed moderate, with capital city housing values dropping by a combined 1.3% in the last 2 months. A number of variables have helped shield home prices from further substantial falls, comprising continuous low marketed stock levels and substantial support from the government.

However, he also added that the longer-term outlook remains highly uncertain as eventually government fiscal support would be withdrawn, and banks would require borrowers to repay loans. Eventually, economy and borrowers would need to abide by market forces, which is when there can be an increase in mortgage arrears and a raise in forced sales.

Estimates of market activity indicated further progress in June from April lows, in spite of home values being down in June. Also, improved consumer sentiment readings showed increasing housing market activity in the same month.

Further, higher-value markets have shown to be more volatile to changes in the environment, having directed both the upsurge and downturn over previous cycles. The trend is mostly driven by Sydney and Melbourne, where upper quartile is down by 1.3% and 3.7% in the past 3 months (April-June 2020), respectively. However, lower quartile values are up 0.2% in Sydney and are down 0.5% in Melbourne over the same period.

Market experts have stated that the housing market has been slowing down. The declining home prices accompanied by high unemployment, halted immigration, and rent holidays are expected to further push prices lower down in 2021. Melbourne especially remains at the risk of higher price fall in home values as its second lockdown has put more businesses and households on edge.

Hence, steepening COVID-19 cases, as well as the removal of fiscal support, are the key risks that remains and would determine the housing prices.

Let’s have a look at few property stocks.

Charter Hall Group (ASX:CHC)

Charter Hall Group shares have provided a positive return of 85.6%, from a low point of $5.29 on 23 March to a high point of $9.82 noted on 17 July. On 20 July 2020, CHC settled at a price of $9.84, up by 0.204% compared to its previous close.

As per a trading update dated 15 July, CPIF (Charter Hall l Prime Industrial Fund) and another CHC run international institutional partnership have each acquired an industrial property with a site area of 30.6 hectares located in Sydney’s Minto suburb from Qube Holdings Limited (ASX:QUB) for an aggregate consideration of $207 million. The property is 100% leased to 4 main automotive logistics tenants who are Mazda, CEVA, PrixCar and Dial A Tow with an average lease expiry or WALE of 4.2 years.

David Harrison, CHC’s Managing Director and Chief Executive Officer stated that the acquisition along with its logistics transactions (announced recently) had contributed to the growth of its industrial and logistics portfolio by $1 billion since the beginning of June and would further extend the Group’s plan to become a principal player in the Australian industrial market.

Mirvac Group (ASX:MGR)

Shares of Mirvac group have given a positive return of 26.4%, from a low point of $1.70 recorded on 19 March to a high point of $2.15 on 17 July. On 20 July, MGR last traded at $2.13, down by 0.93% from the previous close.

As per its June update, the Group declared its distribution of 9.1 cents per stapled security for the year ending 30 June 2020. As Mirvac has already paid half-year distribution of 6.1 cents per stapled security, distribution stands at 3 cents per stapled security for the year ending 30 June 2020 which is anticipated to be paid on 14 September 2020.

The Group’s preliminary valuations excluding Investment Property Under Construction (IPUC) for 30 June 2020 throughout sixty-three assets signify a decrease in value of $306 million, or nearly 2.8% compared to the book value as at 31 December 2019.

Moreover, as per latest media reports, MGR’s residential division has a pipeline of 27,551 lots totalling to $13.9 billion worth of projects. The Group expects 65% of its EBIT in the upcoming 3 years to come from its master-planned communities.

Further, Mirvac has cash and undrawn debt facilities in excess of $1.3 billion, with only $200 million of debt owed for repayment between present time and initial 2022. MGR holds a credit rating of A3/A- from both Moody’s and Fitch. The financial results of the Company are due to be released on 20 August this year.