INSIDE INVESTOR: The back door to property profit

Want to make money out of a property market recovery without spending a fortune?

Buying a property is major commitment. Apart from the cost, you are locked in for the long haul because sometimes selling a property for the right amount isn’t easy.

But there are other ways to profit from real estate. And one of the most popular is to buy shares in companies that are involved in the industry.

We are in the early stages of a recovery in the residential property market. It’s unlikely to be a return to boom conditions. But it is recovering from the trough of 2011 and last year.

And the benefits are likely to flow through to a range of stock exchange listed companies.

The two obvious groups of companies that benefit from a residential housing recovery are the building materials companies and the property development companies.

Both groups have been on a run for much of the past year.

The building materials groups like Boral, James Hardie, CSR, Fletcher Building and Adelaide Brighton Cement have all attracted enormous shareholder support on the expectation they will see a huge lift in earnings from a construction boom.

Boral and James Hardie operate in the US and Australia, and the American housing market – which crashed spectacularly in 2007 and sparked the global financial crisis – at last is showing signs of life.

Unfortunately, both companies are expensive as the recovery expectations already have been priced in. But they could represent good buying if their prices ease back in the future as those who paid too much look elsewhere.

One of the factors affecting both developers and building materials groups is the changing nature of housing. Rather than detached single houses, there is now greater demand for medium density housing closer to urban hubs.

That means less building materials per head of residents which obviously will affect the materials suppliers.

But it also is having an effect on the developers like Stockland, Mirvac and Lend Lease. Housing developments take years to plan and build. So the big projects undertaken by Stockland and Mirvac on the outskirts of Melbourne and Sydney in recent years have been a drag on their stock prices.

Both now plan to concentrate on the more profitable inner city, medium density dwellings that Lend Lease has favoured. Construction approvals are on the increase here, in New Zealand and in the US.

It’s just a matter of getting in at the right price. A bit like buying a house really.