Quarterly Update – Retail Sales Slides, Residential Peaking
UBS | May 01, 2017 14:07
Originally published by UBS Asset Management
I recently mentioned some quant work that Andrew McCauley from Veritas Securities had produced showing that April returns tend to be strong. He said that since 1985, the S&P/ASX Financials ex REIT (ex-A-REITS or the XXJ Index) has delivered consistently strong returns during the month of April. This has occurred 87% of the time or 28 years out of 32, with the average return just shy of 3%. In terms of the REITs, returns were positive 81% of the time or 26 years out of 32 with an average ~2.2%. As we approach the end of April REITs are up +3.3% and the broader market financials (XXJ Index) is +1.8%. For what it's worth, REITs have delivered positive returns ~70% of the time in May at an average rate of 0.9%.
There were a few March quarter updates this week, with Stockland (AX:SGP), Mirvac Group (AX:MGR) and GPT Group (AX:GPT) of most interest. The REITs reported strong residential conditions but a sluggish retail environment, and this was proven when Wesfarmers Ltd (AX:WES) provided their quarterly update. Coles food and liquor sales in 3Q17 were +1.2% on the pcp, which was a slight deceleration on the +1.6% reported in 2Q17. Kmart sales in 3Q17 were up +2.5% while Target sales were down -18.1% on the pcp.
MGR tightened its FY17 EPS growth guidance from +9–11% to +11%. The guidance requires >45% of residential settlements to take place in the June quarter. The bulk of this is already pre-sold. SGP retained their +6–7% FFO growth guidance for FY17 with very strong residential sales offsetting a softer retail sales environment. There's more than enough profits in their residential business to offset any weakness elsewhere. Their sales (net deposits) are up +24% vs the same period last year and importantly ~75% of their sales are to first home buyers and upgraders (as opposed to investors). GPT announced its 1Q17 operational update re-affirming FY17 guidance of +2% FFO growth and DPS +5%. While SGP and MGR are FY end stocks, GPT is calendar year end so this quarters update was less material.
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Interestingly there were two reports out this week from UBS Economics and Moelis Australia calling the top of the housing cycle. Residential building approvals looked to have peaked and with everyone calling for action it seems it will get tougher for people to borrow. They're calling a peak, not a crash or break down, and a slow adjustment down post the tightened measures and the lack of affordability. There appears no catalyst for a crash given the strong population growth of 1.5% in Q3-2016 (+349k year on year which is the most in three years). Migration rebounded to 193k, despite the end of the mining boom. Of note was that when looking at Australian housing from a Chinese investors perspective, the average Australian house is only 13% more expensive than five years ago (due to currency moves). And despite all the noise about State Governments lifting taxes for foreign buyers, it's nowhere near Hong Kong levels.
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