We have been diving deeper into the Building Product Manufacturer space of the past year in order to provide our clients with a broader picture of the overall housing market. It has become clearer to us that this space offers a positive diversification to a portfolio of investments looking to benefit from the eventual rebound of the housing market.
Many private and public investors have been scouring the residential real estate landscape for potential investment opportunities. Initially, the focus was on acquiring finished lots. The competition from builders for the nearer term desirable lots has substantially limited the opportunity for speculative investors to buy and hold such finished lots until the market recovers. Lots in outer-lying areas are still available at low prices, but investors are realizing that these lots are available because builders are passing over them while focusing on lots that can be turned in the near term to generate a faster return of capital and profits.
The case for investing in the Building Product Manufacturer space includes a few key elements:
- Allows an investment in the eventual recovery of the new home construction market, without the need to buy and manage an inventory of land with a longer (2 to 10 year) hold.
- Publicly held BPMs also offer the investor a much more liquid investment than a direct real estate investment.
- BPMs serve the remodeling industry as well as the new housing industry. Right now, remodeling is a much bigger share of their business. The remodel industry appears to have stabilized in 2010 and is showing encouraging signs of a rebound. The remodeling industry, while also subject to cyclicality, is a much more stable environment than the new housing market.
- There are other factors too – cash flows tend to be much more stable; brands are more important; most of the BPM verticals are far more consolidated (some have only 3-4 major players, including carpet, asphalt roof tiles, drywall, metal wood-to-wood engineered connectors, among others); more diverse end market exposure (international, commercial new and remodel, or even completely different businesses).
- Finally, the remodeling industry should perform well for the next several years as the Shadow Inventory of distressed homes find their way through the foreclosure recycling process. These homes will need work ranging from paint and carpet to major rehab/renovation work – all good for the remodel space.
The vast amount of homeowners with underwater mortgages will keep people in their homes longer, which should have a positive influence on the need for remodeling, albeit with lower-cost projects than during the housing boom.
