April 4, 2014 / 8:06 AM / in 4 years

Aussie investors hitch ride on home building through 'secondary exposures'

SYDNEY, April 4 (Reuters) - Investors wanting to profit from steadily increasing home construction in Australia without being overly exposed to the property sector’s volatility are loading up “secondary exposure stocks” such as paints and building material suppliers.

Secondary exposure stocks are companies that benefit greatly when the housing sector does well yet are not wholly reliant on that sector to make money - making them less volatile and less prone to fall when the housing sector does not do so well.

So far this year the strategy has paid off as these secondary plays have far outperformed pure property stocks.

Property companies such as Lend Lease Corporation Ltd and Stockland Coporation, for example, have risen 6.9 percent and 2.8 percent respectively.

Whereas, secondary exposure stocks such as building materials supplier Boral Ltd and real estate advertisement company REA Group Ltd are up 17.8 percent and 27 percent respectively this year.

Fund managers said they liked these secondary exposure plays such as paints, cement and furniture because they offered both exposure to the housing sector and diversification away from it.

Another reason secondary exposures are holding up are due to renovations on existing homes in Australia, where the vast majority of house sales are existing dwellings.

Spending on ‘residential alterations’ in the 12 months to February was A$6.5 billion, a significant amount of money for Australia’s 22.7 million population.

“We generally look at secondary exposures in an attempt to reduce the development risk exposure. They have got more diverse earnings across multiple markets rather than just being exposed to the Australian developer market,” said Jonathan Fyfe, investment adviser and associate discretionary portfolio manager at Wilson HTM Investment Group.

Wilson HTM holds stocks in Boral, James Hardie and cement maker Adelaide Brighton Ltd.

While the Reserve Bank of Australia, which cut interest rates to an historic low of 2.5 percent last August, is counting on home construction to support an economy adjusting to the end of a long boom in mining investment.

Around 200,000 new homes are expected to be built this year, based on current trends, according to data from the Australian Bureau of Statistics.

But, investors are still wary.

One major risk is the sometimes long lag between building approval for new homes being granted and the actual building of those homes - time during which market conditions can change.

“We’ve seen approvals move up quite aggressively, but we haven’t seen the amount of housing starts as yet being implemented, because it takes some time, there’s a lag effect,” said Paul Xiradis, CEO of Ausbil Investment Management Ltd, an Australian boutique fund manager.

“It depends on how long you think the duration of the housing cycle will be and how long it will last for - it could continue for a good period of time,” he said.

Another reason investors are pouring into secondary exposure stocks is that pure property companies have performed well over the past year. Some investors saw further gains limited, though there stll potential to outstrip the broader market so long as demand for new construction holds.

“I think once they get into the full swing, you’ll see the true operational leverage these companies do have, which could be quite high,” Ausbil’s Xiradis said.

AV Jennings, which deals in house and land packages, posted a profit after tax of A$8.4 million compared to a loss in the previous corresponding period, while property company Mirvac Group posted a rise of 36 percent in revenue to A$978.8 million.

Since the start of the year, AV Jennings Ltd has gained 0.8 percent, while Mirvac is up 1.2 percent, both broadly in line with the benchmark S&P/ASX 200 index, which is up 1.2 percent.

A Reuters poll forecast the ASX200 would rise just over 8 percent by year end, driven by strong coporate earnings, a weaker Australian dollar and improving global economic growth. (Reporting by Thuy Ong; Editing by Nachum Kaplan and Simon Cameron-Moore)

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