The impact of housing figures on real estate shares

Real estate shares are in a very strange place right now. After months of speculation, the real estate market seems to have officially taken a dive in the past month. A recent building approval report from the Australian Bureau of Statistics (ABS) shows that new house approvals for May were 4.4% softer than April’s figures. Private sector dwellings excluding houses were down a massive 34.9%. The number of total dwellings was down by 16.4% compared to April.

The value of total building approved fell 13.5% in May, in seasonally adjusted terms, with residential building falling by 17.3% and non-residential building declining 7.1%.

The ABS goes on to point out that, due to the lag in the process, the May data likely reflects applications and levels of demand prior to the introduction of major restrictions.

Real estate shares impacted

While this lag means the worst is yet to come in terms of figures, I believe the market expects the government’s HomeBuilder stimulus to cushion the blow significantly. For instance, both the companies listed below continue to see share price growth despite being exposed to the fall in new house approvals .

These companies both have large pipelines of residential housing with estimated values in the billions. Yet in both cases, they are still holding a large percentage of properties at a time when housing approvals have dropped overall by 16%.

For example, Mirvac Group (ASX: MGR) has an an estimated value of $18.8 billion of residential real estate in progress, with a further $2 billion planned. According to the company’s H1 Analyst toolkit, they have only settled 37% of these houses.

Mirvac has entered into $810 million of new debt facilities over 3-4.5 years. This has provided the group with cash and undrawn debt facilities in excess of $1.3 billion, with only $200 million of debt due for repayment between now and early 2022. It seems investors believe this has provided the company with the financial cushion it needs to withstand the current situation.

The Mirvac share price rose by 4.48% on Thursday to close at $2.33.

Additionally, Stockland Corporation Ltd (ASX: SGP) has 76,000 residential lots with an estimated market value of $21.7 billion, according to its 30 June 2019 portfolio. Only 52% of these lots have been settled. However, the company has reported a level of pent up demand. Moreover, it has reported that since mid-May, residential real estate demand has recovered to above pre-COVID levels. This has converted into an accelerated pace of net sales achieved.

The Stockland share price rose by 2.32% to finish the day at $3.53 on Thursday.

Foolish takeaway

At the same time the ABS data has shown a very steep decline in approvals of new dwellings, house prices have also started to fall. I think there are several ways this can play out.

The HomeBuilder stimulus is going to have a positive impact on new houses and it’s likely the lag time in the market is obscuring this. However, the banks are unlikely to allow for a stay of housing loan repayments beyond September. In fact, the Commonwealth Bank of Australia (ASX: CBA) has already stated it wouldn’t extend COVID-19 support beyond 30 June.

There is simply no doubt that we are living in interesting times. Even if the prime minister was to extend JobKeeper and/or HomeBuilder, which already represent sizable and rapidly growing financial burdens for future generations, it is only part of the picture. Residential real estate-exposed shares are far too uncertain for me, and not somewhere I would currently invest.