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Why these 2 property stocks could be about to fall

Over the last five years property groups have seen a major recovery in their stock prices. The same property groups suffered massive declines in their stock prices during the height of the Global Financial Crisis (GFC) of 2008.

Is the recovery in the stock prices an indication that property construction, development and related property investment management businesses are getting better, or could a slowing domestic economy and global economic issues pose further risks to their business models?

I will look at two major Australian property groups, to determine if that is the case.

Charter Hall Group (ASX: CHC)

Charter Hall has an $14.8 billion portfolio of office, retail, industrial and hospitality property assets. Since 2010 the company has seen its stock price almost double in value.

From 2010 onward, business performance numbers are telling the story of a business moving towards improvement and growth. For the financial year 2015 earnings related to property investment achieved 17.3% growth, whereas earnings related to property funds management attained a 25.2% growth.

The earnings have been recording double-digit growth since 2010. However, the management team now expects the earnings to grow only by single digits between 7% and 9% for the coming year.

The stock is currently trading at a price to earnings ratio of 13.7 with a 5.5% dividend yield. It has been ranked as one of the best performing Australian Real Estate Investment Trusts (A-REIT) over the last three to five years.

Charter Hall’s property assets are mainly in Australia, making it dependent on the performance of the economy at home.  Any downturn could have an adverse effect on the business.

Lend Lease Group (ASX: LLC)

Lend Lease is a much bigger property group than Charter Hall with $44.9 billion worth of development projects in the pipeline. It is also the largest owner and operator of retirement villages in Australia.

The stock price performance over the last five years has been similar to Charter Hall, increasing by approximately 71% since 2010. A $619 million profit after tax for financial year 2015 is impressive, but is 25% lower compared to the previous year.

Unlike Charter Hall, Lend Lease has a major international presence. This provides diversification away from a total reliance on the home economy. The stock price is currently trading at price to earnings ratio of 11, which is depressed as markets are cautious on the outlook due to volatile local and global conditions.

Foolish takeaway

The stock price of both Lend Lease and Charter Hall has been on a declining trend over the last six months. A slowing economy at home and volatile global conditions are making investors cautious about property businesses, which rely directly on vacancy and ownership rates of houses, buildings, warehouses and offices. A slowing economy will have a direct impact on vacancy rates. So a Foolish reader may just want to watch these two stocks and look at other high quality businesses for investment.

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Motley Fool contributor Qaiser Malik has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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