The importance of supply-side activity
Although housing sales can influence real estate developers’ decisions—such as how much steel to purchase, how many buildings to construct, and when to construct—it’s also important for investors to evaluate what’s happening with the supply side of real estate. Real estate activity cooled in 2010, when soaring real estate prices hurt purchases and constrained supply.
In August, construction activity (measured in area of floor space under construction) grew at a year-over-year rate of 17.20% and land purchase activity grew 14.53% year-over-year. While both indicators fell compared to July, they still remain in an uptrend. The data reflects the six-data-point rolling average of monthly activity, because like sales data, monthly data can also be volatile.1
Property development activity rising
The two indicators have been in an uptrend since mid-2012, when interest rate cuts and government stimulus were announced to energize deteriorating economic fundamentals. The need for a smooth transition in power also meant the government needed stable economic growth to reduce the possibility of social unrest.
Although the government publicized the need to keep soaring housing prices under control, that has not stopped real estate developers from purchasing more land and building more floors. As property sales often lead construction activity, the next few months of data are important to watch.
Effect on dry bulk shippers
As long as the growth rate doesn’t roll over like it did in 2011, the current data bodes positive for dry bulk shippers such as DryShips Inc. (DRYS), Diana Shipping Inc. (DSX), Safe Bulkers Inc. (SB), Eagle Bulk Shipping Inc. (EGLE), and Navios Maritime Partnerships Inc. (NMM) because high construction and land purchase activity mean more commodity imports.