Stocks exposed to the residential market have been on the back-foot as worries about falling home prices takes the gloss off the sector.
Ironically, this might actually provide a nice earnings boost to online property classifieds company REA Group Limited (ASX: REA) with the stock jumping 2.5% to $79.90 during lunch time trade after Citigroup upgraded it to a “buy” from “neutral”.
The broker noted that lower clearance rates for auctions are a leading indicator of volume growth for REA Group.
“Auction clearance rates declined all through CY17, from the high 70s at the start of the year, to finish in the mid-60s. Historically, falling clearance rates have been a leading indicator of rising new listing volumes, as failed sales lead to a rise in the number of new listings needed per property sold,” said Citigroup.
“If clearance rates fall back to a balanced (50-65%) level we expect to see growth in new listings, however a severe decline (~40%) would see risk of declines as vendors withdraw from the market altogether.”
This should theoretically also be good news for rival Domain Holdings Australia Ltd (ASX: DHG) although home and apartment builders like Mirvac Group (ASX: MGR) and Stockland Corporation Ltd (ASX: SGP) would be nervously watching for any further signs of weakness in the market.
Coming back to REA though, the outlook for the group looks positive and Citigroup believes that depth penetration rates for new property listings will only increase from current levels of 63% to 69% in FY20 before reaching 80% in the long-term.
“In addition, REA’s pricing structure encourages agents to continue to move up the product curve, with this leading to our forecast for a 3-year CAGR of 22% for depth revenue,” added the broker.
The stock is outperforming the market with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) up a more modest 0.4%. There’s room left for REA to climb too, going by Citigroup’s price target of $90 a share.
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