Two property Small Cap Stocks01.04.2014

Investors are piling into small cap stocks that are catering not for the rich, but for the masses. These small companies have products for people who are either retiring or are looking for a low entry point into the property market.

Small Cap Stocks in the Property Sector delivering strong investment returns

Since we, Under the Radar Report, first tipped the small cap stock, retirement property specialist Ingenia Communities (IGA) early last year it has doubled our subscribers’ money. Elsewhere, shares in Villa World (VLW) have returned subscribers almost 30 per cent in less than four months. This property developer sells affordable house and land packages for between $300,000 and $500,000.

Unlike its competitors, Villa World does not accept variations which means its customers cannot make changes to the properties. This means it can achieve a production line type situation where it develops 50 to 60 blocks at a minimum and often 200 to 300 at a time.

Both companies are able to target the masses because their business models are different from their bigger, capital rich completion competitors, and involve innovative ways to keep costs down.

Small Cap Stock Ingenia produces cheaper housing for retirees and first home buyers

Ingenia’s chief executive Simon Owen sums up the rationale:  “There is no point being the fifth or sixth biggest player in the asset rich end of the market. We are targeting the lower to middle market, which is people reliant on the pension to cover their living expenses.”

Late last year Ingenia announced that it had purchased a beachside tourist park just north of Newcastle for $11 million on a trailing yield of 10.6 per cent, which would generate a yield of 15.5 per cent upon development. Compare these yields to the one on the average residential property of about 4 per cent, while the typical cash yield from the deferred management fee model would be in the range of 6 to 8 per cent.

Ingenia is deviating away from the deferred management fee model favoured by the big players in the sector like Lend Lease, FKP and Stockland.
Under this arrangement, those who have high valued property and little cash are able to sell their property and pay for a lifetime leasehold interest in the retirement village. The small cap property company doesn’t collect any cash or profit when the resident lives there, which is usually for 10 to 15 years. Only when the resident leaves and the property is on sold does the property company get 30 per cent of the property’s value as payment.

In contrast, Ingenia’s model is more attractive for fund managers who like to see the money today. Here, the resident buys the home for a much lower sum and then pays $140 a week in rent. Says Owen, “We’re targeting a market where someone owns a property worth $400,000 and can buy a retirement home for 50 per cent of this amount, still have the pension and comfortably pay the rent.”

Small Companies lead the way: Manufactured homes a big player in the future of Australia's Housing

Helping to keep the costs down, and its returns up, is Ingenia’s preference for manufactured accommodation. As we said in July, at Under the Radar Report we believe that manufactured homes is a big part of the future for housing in Australia because it costs so little in comparison to building homes through conventional methods, which require numerous tradesmen and more building materials.

Keeping the costs down and the returns up is driving retirees, first home owners and investors into these two small caps.


About the Author

Richard Hemming

Investment analyst and Editor of Under the Radar Report

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