Here’s One Sector You Want to Keep a Close Eye On

Growth in Real Estate with Magnifying Glass

You’ve probably heard plenty about the usual economic trends, such as the trend in business confidence or the trend in interest rates. I like to think of these as micro-trends.

What you likely haven’t heard much — if anything — about are the macro-trends in operation above these micro-trends. Over in the US there are several macro-trends all converging into one sector. Making this particular sector, one to watch.

Macro-trend number one is the ageing US population. According to data from the US Census Bureau, there are around 76 million baby boomers living in the US today. That’s almost a quarter of the US population. It’s an extraordinary number to be coming into their retirement years.

The second macro-trend is that many of the baby boomer generation don’t have enough in their retirement savings. This is from a recent article in the New York Times:

On average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the Federal Reserve’s Survey of Consumer Finances.That’s not nearly enough. And the situation will only grow worse.

The Center for Retirement Research at Boston College estimates that more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement, even if the members of the household work until 65, two years longer than the average retirement age today.’

The third macro-trend is rising property prices. While they may not have enough savings, many of these baby boomer retirees have considerable equity locked in their homes.

Rising property prices, insufficient retirement funds and an ageing population all converge to make manufactured home estates an appealing option to boomers who want to downsize.

This sector offers a low cost housing option in comparison to traditional homes. It allows residents to free up the locked equity in their home to spend on their retirement years.

I’ve mentioned manufactured housing estates before. Called MHEs for short, these are places where residents, generally over the age of 55, own their factory-made homes but pay a weekly site rent to the owner-operator.

It is useful to look at the US market because in the US, manufactured home estates are a far more mature sector than in Australia. Looking to the US can give you a good indication of what lies ahead for this sector here in Australia.

In the US, the two major listed companies in this sector are Equity Lifestyle Properties Inc. [NYSE:ELS] and Sun Communities Inc. [NYSE:SUI].

Equity Lifestyle Properties is the largest operator. Here is the monthly chart for Equity Lifestyle Properties.

Equity lifestyle properties monthly bar chart

Source: Market Analyst

Click to enlarge

The chart tells you that the weight of money in the US suggests there’s a strong demand for this type of housing. If you bring up a chart for Sun Communities, you’ll see a similar story.

You can see this stock bottomed out in November 2008, months before the general market did in March 2009, signaling this company was in a strong position. Why?

The residents of these manufactured housing estates owned their housing units outright. There were no unaffordable mortgages purchasing an unaffordable land price. In this instance, there is no land to buy; it is leased from the operator. Can you see that these residents experienced none of the credit exposure associated with the broader economy, such as sub-prime?

Profits for this company will depend on how cheaply they can buy land. As the GFC ran its course and land prices in the US continued to decline, the company could make further acquisitions cheaply. This increased profitability, and of course the share price quickly factors this in. From the GFC lows this company has been in a strong uptrend ever since.

Over at Cycles, Trends & Forecasts, this is precisely what we show and teach you. How to identify such megatrends and take advantage of them before they happen. The biggest trends ALWAYS involve the economic rent — the largest of which is land value. If you don’t understand this, you can find out more here.

The US economy generally leads Australia, so this is one sector you may want to follow closely here. It’s why, at Cycles, Trends & Forecasts, we study the US first. And of course, Australia faces all the same problems as the US; an ageing population, baby boomers with insufficient funds to retire, and rising property prices.

But can you see why these properties are so appealing and affordable to retirees? Sure the structures, built prefabricated in a factory, are cheaper than a normal site built house. But that’s only half the story.

When new residents buy into one of these estates they are buying the house only, not the land underneath. They pay that as a weekly site rent. Take away the huge hurdle of upfront land costs, replace it with a site rent and all of a sudden housing becomes much more affordable.

On the Australian stock exchange, we have several companies that are involved in this sector, including Ingenia Communities Group [ASX:INA], Lifestyle Communities Ltd [ASX:LIC], and Aspen Group[ASX:APZ]. Last month they were joined by a new player, Gateway Lifestyle Group [ASX:GTY], which is looking to profit from this emerging trend and is now the largest player in the Aussie market. This is a company you can follow now to track the Aussie real estate cycle. We suggest you watch as this newly listed company goes on an aggressive acquisition drive in order to capture and collect the rent.

According to chief executive Trent Ottawa, the business has been profitable from day one, with most residents receiving the age pension and rent assistance from the federal government. Guaranteed profits for the company, in other words.

Another advantage for the operator is that the residents own their homes, so the owner is not liable for any upkeep.

The weight of money in the US is indicating this is a hot sector. It looks like it also will become an appealing option to the first waves of the boomer generation here in Australia, many of whom have insufficient super funds to fall back on.

The only unknown factor for many is land price. Should land prices go higher, this housing option will become ever more popular as retiring boomers unlock the land value in their family home.

Land price is key to the cycle. Nobody ever teaches you to follow this. Except over at Cycles, Trends and Forecasts. It is so important for your investing success to understand this. History clearly shows that the cycle unfolds in a predictable sequence and timing.

You can use that sequence and timing of the real estate cycle to your investment advantage. To learn more go here.


Terence Duffy,

For The Daily Reckoning, Australia

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