I don't know about you but I'm starting to get a feeling in my bones that our febrile ASX is headed for trouble. For me, the market seems to have recovered too quickly and the cynics are starting to become very loud. Moreover, I think real estate is likely to be the bellwether sector. From retail to housing to commercial real estate, the indicators lie somewhere between confusing and concerning. So if there is a fall in commercial property values and residential house prices, how will this impact the ASX?
The retail sector
GPT Group (ASX: GPT) yesterday downgraded the value of its seven directly held retail assets by $476.7 million. This is approximately 8.8% of book value at 31 December 2019. This resulted from an independent valuation. GPT's Chief Executive Officer Bob Johnston explained the revaluation as resulting from the effects of COVID-19. He held up reduced foot traffic, reduced rental growth, as well as increasing vacancy and abatement rates as contributing factors.
The recent release of the Australian Bureau of Statistics official retail data for April painted a further bleak picture. The report contained the strongest seasonally adjusted fall ever published from the retail trade survey.
Scentre Group (ASX: SCG) and Vicinity Centres (ASX: VCX) also have high exposure to the same retail headwinds.
The housing sector
The third-quarter update from Commonwealth Bank of Australia (ASX: CBA) forecasts a fall in the Australian house price index, a proxy for house prices, of between 11% to a worst-case scenario of 32%. REA Group Limited (ASX: REA) also reported a 33% slide in residential real estate listings during April.
According to its 2019 portfolio report, Stockland Corporation Ltd (ASX: SGP) has a development pipeline of 76,000 lots of residential real estate. The company estimates this has an end market value of $21.4 billion. In the event of falling house prices, the negative financial impact on this ASX 200 company is inevitable, in my view.
Of course the impact of falling house prices spreads a lot wider than just ASX listed real estate investment trusts (REITs) and developers. Boral Limited (ASX: BLD), for example, is likely to see the impact of a real estate downturn on its earnings, among its other issues. Furthermore, the major banks will also likely see a reduction in lending, with CBA being the country's largest mortgage lender.
Commercial real estate
The commercial real estate market is still very uncertain. It remains to be seen what the impacts of the 'work from home model' and widespread business closures will be on this sector. GPT Group also has significant exposure in this sector as it has 41% of its funds invested in premium office space.
Another major participant in the commercial real estate sector is DEXUS Property Group (ASX: DXS). Dexus is a 'pure play', Australian office REIT. It has around $15 billion invested in office real estate across central Sydney, Melbourne, Brisbane and Perth.
Foolish takeaway
A real estate downturn is likely to weigh heavily across many sectors on the ASX. However, I believe Vicinity Centres has the balance sheet to withstand this disruption. I also feel that with all major REITs on the ASX underperforming the market since the 23 March trough, they should still see high share price growth once the market stabilises. If you can withstand the near-term volatility, the Vicinity Centres share price is currently selling at a P/E ratio of 5.42.
