Crane count, rents and retail

The UBS economics team recently upgraded their residential (houses and apartments) commencement forecasts, with 2016 upgraded to a record 228k, 2017 lifted to a still strong 205k, before a sharper moderation to a still solid 180k in 2018. The big increase in commencements is driven by record apartment approvals. Note that there is a lag between commencements and completions, thus the physical supply (dwellings ready to be lived in) is expected to peak in early 2018.

Perhaps the message is spreading with Wednesday's approval data for September showing that residential approvals fell ~9%, driven by high density approvals that fell -17% (post the +24% gain in July).

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Size matters

In addition to the approvals data, we should also consider the size of the dwellings. In terms of housing, the standard new build is 10% larger than two decades ago and more than 30% bigger than in 1986. It has dipped slightly in the past few years but with bigger houses, we need more things to fill it. In relation to apartments, the size peaked around 2010 before developers realised they could sell more if they reduced the size.

So what does this all mean?

Massive supply in a concentrated area will create downward pressure on rentals and values. This is particularly concerning for those investors around the Melbourne and Brisbane CBD's. If you're buying into areas with lots of cranes, patience is the key. The public link to the crane count maps is via the ABC News website.  (VIEW LINK)

High volumes of completions and expanding areas is good news for retail sales and directly leads to demand for household goods (appliances and furniture). The big winners are firms like JB Hi-Fi (JBH) and Harvey Norman (HVN). Their success will also be good for their landlords, with HVN owning a lot of their stores and REITs like Aventus (AVN) which own bulky good centres. We are overweight AVN in the fund.

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Written by Pat Barrett, Property Analyst, UBS Australia:  (VIEW LINK)