How best to participate in a prolonged building cycle in New Zealand
By Murray Brown, Senior Portfolio Manager, New Zealand
03 August, 2016
With new residential building starts in New Zealand already ahead of long term averages, Auckland's proposed Unitary Plan will likely see the residential cycle stay 'higher for longer' and make the boom-bust cycles of the past much less likely, in our opinion.
The Auckland Council recently released the independent panel's recommendation of the Unitary Plan for housing development over the next 30 years. It foresees the need for up to 400,000 additional dwellings based on the Auckland population reaching 2.5 million people by 2041. This implies an annual build rate of 13,300 houses per annum, compared to around 9,400 currently being built. Clearly, builders have a lot of work ahead of them.
A key question is how best to take advantage of this elevated building activity in your New Zealand portfolio. The likely listed companies are Metro Performance Glass, Fletcher Building and to a lesser extent, Steel & Tube.
We have owned shares in Metro Performance Glass since its listing in July 2014. Although it had initial teething problems with its new plant in Auckland, this plant is now running efficiently and the company is very well placed to take advantage of this elevated building activity. The company has around 55% market share, efficient distribution, and its earnings are highly correlated to the residential building cycle. In addition, it has a double glazing retrofit division which should help smooth earnings in slower times.
Fletcher Building is also well placed to take advantage of the building cycle, although it is not a pure-play on New Zealand, as it has substantial operations in Australia and the rest of the world that are not currently performing well. Steel & Tube is more heavily geared to the non-residential building cycle, and its earnings are influenced by the international steel price. Although we don't discount Fletcher Building and Steel & Tube as investment candidates, we favour Metro Performance Glass for the above reasons in our portfolio.