The New Zealand residential construction market has worked itself back to mid-cycle activity levels after the deepest trough in more than 50 years. Forsyth Barr broker Andrew Rooney tells business editor Dene Mackenzie there is scope for building consents issued to increase.
The nature of the house-building market is expected to change in the future to a focus on higher-density living, as has been the case in other countries, Forsyth Barr broker Andrew Rooney says.
Residential consents were close to Forsyth Barr's mid-cycle estimate of 24,300 and they were expected to grind, rather than race, higher over the next two years to a peak of 28,250.
Supply constraints were holding back the rate of growth in the cycle as evidenced by a sustained increase in property prices, particularly in Auckland, Mr Rooney said.
There were three key risks to the cycle grinding higher.
The affordability issue could dampen demand before the supply response was in full swing. The tightening cycle of interest rates could happen sooner than expected.
Any move by the Reserve Bank or the Government to curb rising house prices in Auckland could have a detrimental impact on demand.
New Zealanders liked to live in their own customised detached home, he said.
''This dream is looking increasingly like a dream for future generations as urban density will increase to accommodate the rising population. Higher density living means a different mix and a quantum of building products.''
Building product companies would have time to strategically shift their focus, Mr Rooney said.
Fletcher BuildingThe building cycle backdrop in New Zealand for both residential and non-residential construction was more than offsetting comparably weaker conditions in Australia for Fletcher Building.
Rising residential activity was continuing to benefit all Fletcher Building divisions and would continue to do so.
The recent stalling in residential consents, although temporary, might affect profit growth in the late 2015 and early 2016 financial years, he said.
Mid-cycle margins in New Zealand were less than they had been historically, reflecting real price falls in recent years because of heightened competition and the threat of import competition as a result of the strong New Zealand dollar.
Fletcher Building was understood to be pursuing price initiatives across several key business units, Mr Rooney said.
Metro Performance GlassHousing demand continued to outweigh supply because of resource constraints.
The current trend towards higher-density living, such as apartments and multi-family living, was expected to continue, driven in particular by a sustained shift towards intensification over sprawl through the remaining residential cycle.
Metro Performance Glass offered investors direct leverage in the New Zealand residential cycle, Mr Rooney said.
The company was rated as ''outperform''.
Investment summary
Fletcher Building: The New Zealand residential market is the company's most important geographic market exposure. It accounts for 52% of the company's New Zealand exposure and 26% of group revenue. With New Zealand generating higher margins than Australia and the ''rest of the world'', and the higher-margin nature of residential compared with non-residential, the New Zealand residential contribution accounted for about 35% of group earnings before interest and tax.
Metro Performance Glass: The company offers investors direct leverage in the New Zealand residential housing cycle. Metro offers robust operating leverage driven by a partially fixed cost base and further earnings from non-cyclical opportunities. Housing demand and increasing non-residential activity bode well for volumes and earnings growth.
