Residential property has been on a great run over the last five years. Property owners weren't the only ones to benefit from this real estate boom. Anyone owning shares in companies such as Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corporation (ASX: WBC) has also benefited from the property boom. Investors have received a total shareholder return average of 14.9% and 13.7% respectively over the last five years from these two stocks.
There isn't much growth expected from the banks in the short term with the recent regulatory changes and reductions of the RBA cash rate. The market agrees with this line of thinking; Commonwealth and Westpac shares are trading around the same price today as they were a year ago.
However, you don't need to be a bank shareholder or property owner to benefit from real estate.
Below are two companies related to property that could be solid investments.
REA Group Limited (ASX: REA) is the market leader of real estate websites with a market capitalisation of $7.1 billion. Realestate.com.au, realcommercial.com.au and flatmates.com.au are just some of the websites under its umbrella.
REA Group has been expanding overseas too; its recent acquisition of iProperty Group gives REA more exposure to Asia. REA also has a 20 percent stake in Move Inc, which managed to increase its unique users by 17% to 53 million and increase its revenue by 27% to USD$357 million in FY16.
The strength and popularity of REA's website network has resulted in earnings per share growth from 66.2 cents per shares (cps) in FY12 to 162.6cps in FY16. Its dividend has grown from 33cps in FY12 to 81.5cps in FY16. Astute readers may have noticed that REA has kept its dividend payout ratio around the 50% mark, this means it is re-investing a healthy amount of its profits back into the business, fuelling future growth. REA has a fully franked, trailing dividend yield of 1.49%.
There are two potential dangers to REA's dominance. One being, Domain, REA's main rival, which claims to have the best property app.
So far, REA has maintained its market-leading position without much trouble, however investors should monitor Domain's market share closely. The second danger is a widely-predicted property crash due to an oversupply of apartments, although homes will still be bought and sold during a crash. In-fact, sellers may be more likely to utilise REA's premium listing option to make sure their property is sold.
REA Group's share price has dropped from $65 in July 2016 to $54 today, resulting in its shares currently trading at 33.5x FY16 earnings. This could be an opportune time to acquire some of its shares; analysts are expecting REA's earnings per share to grow to 220.3cps by FY18 (Source: Commsec). This suggests REA is trading at 24.6x FY18 earnings – maybe a justifiable ratio for its predicted growth.
DuluxGroup Limited (ASX: DLX) is the owner of several premium paint brands such as Dulux, British Paints and Cabot's. It also has other products including garden care, garage doors and cabinet hardware. At $2.5 billion in size, Dulux is one of the smaller constituents of the S&P/ASX 100 (ASX: XTO).
Dulux paints a less exciting picture compared to REA, but it could still be a solid investment. Dulux's 19.44 P/E ratio is higher than the market average of 17.29. However, it has consistently grown its revenue, even throughout the GFC, so it may be worth that small premium.
A company like Dulux could perform well in all market conditions. Owner-occupiers and investors alike tend to paint and renovate a property just before, or after, a property sale.
Dulux also pointed out in its recent presentation that around 70% of properties in Australia are older than 20 years. This suggests there are many renovations and home improvements on the horizon.
Dulux shares aren't trading cheap for a low-growth company. It can be quite poor at cash conversion, along with low margins, meaning a downturn in the economy could hurt its results.
However, Dulux has a fully franked dividend yield of 3.5% and it could provide a good mix of income and growth for long-term investors.
Foolish takeaway
You don't need to own an investment property to benefit from the property sector. Dulux and REA could provide shareholders with much better diversification than having all their eggs in one building-sized basket.
