House prices are tanking. Will ASX property shares go down with them?

Home values across Australia fell in 2022 at the fastest rate since the GFC.

A man sits at a desk holding a small replica house in his hand, upset at the sale of his property.

Image source: Getty Images

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Key points

  • Australian home values fell in 2022 at their fastest pace since the GFC 
  • Home values lost 5.3% nationally while the ASX 200 lost 5.5% and ASX property shares dropped almost 25% 
  • We review the performance of the top 10 ASX property shares by market capitalisation in 2022 

Australian home values are falling at their fastest rate since the global financial crisis, so will ASX property shares go down with them?

According to CoreLogic data, home prices fell 5.3% in 2022. Back in 2008, they dropped 6.4%. (These numbers combine all types of residential properties — houses, townhouses, and apartments).

The price declines in 2022 were greatest in Sydney (down 12.1%) and Melbourne (down 8.1%).

But what happened to ASX property shares?

If home values drop, will ASX property shares fall too?

Let's take a look at what happened to ASX property shares or real estate investment trust (REITs) in 2022.

Real estate is one of the 11 sectors of the ASX. Over 2022, the S&P/ASX 200 A-REIT Index (ASX: XPJ) fell 24%. This compares to a 5.5% drop in the benchmark S&P/ASX 200 Index (ASX: XJO).

As seen here, individual results among the REITs varied substantially.

This is the top 10 ASX property shares by market capitalisation:

ASX property sharePrice movement in 2022
Goodman Group (ASX: GMG)-35%
Scentre Group (ASX: SCG)-9%
Vicinity Centres (ASX: VCX)+18%
Stockland Corporation Ltd (ASX: SGP)-14%
Mirvac Group (ASX: MGR)-27%
GPT Group (ASX: GPT)-22.5%
Dexus Property Group (ASX: DXS)-30%
Charter Hall Group (ASX: CHC)-42%
Lendlease Group (ASX: LLC)-27%
Charter Hall Long WALE REIT (ASX: CLW)-12%

Why did ASX property shares fall in 2022?

The important thing for investors to note is that the bulk of REITs are either not associated with the residential housing market, or have only limited exposure.

Most of them hold portfolios comprising retail property, offices, and industrial property such as warehouses and shopping centres. There are exceptions, of course, like apartment developer Mirvac Group.

However, in a climate of rising interest rates, ASX REITs with substantial debt or leveraging will be affected. Why this occurs is obvious — interest costs are rising, while property values are falling.

The REIT companies that build property have also been subject to the rising costs of inputs like timber due to inflation and ongoing global supply chain disruptions.

ASX property shares can also be affected by falling land values in a market downturn. This reduces the value of the assets on their books.

But remember, most of these REITs are not holding property with the aim to sell it and distribute capital gains to shareholders. REITs are traditionally much more of a yield play than a growth play.

And therein lies an opportunity with REIT shares for investors today.

REITs are reliable dividend payers

ASX property shares tend to involve commercial property, and average tenancies are much longer term than residential leases. Traditionally, rental returns are steadier, hence distributions are relatively stable.

REIT yields are presently higher because share prices fell so much in 2022.

One of the highest dividend payers among ASX property shares is the Centuria Office REIT (ASX: COF). Its share price dropped 35% last year and it is $1.60 today. That gives it a trailing dividend yield of 9.5%.

There are also ASX property shares that aim to deliver more share price growth than yield. Goodman Group is a great example.

Over the past five years, the Goodman share price has risen by 150%. That includes the 25% decline in 2022. So, that's an average annual share price gain of 30% per year. A residential property could never match that. Goodman is forecasting an 11% growth in earnings per share (EPS) for FY23.

Should I buy property or shares?

Whether ASX shares or property is a better investment is an age-old debate among investors that will rage on forever. Ideally, a bit of both is the way to go because it provides investment diversification.

But if you had to choose one, ASX shares might be more appealing for several reasons.

The scale of initial investment is probably the biggest drawcard of shares. ASX shares investing allows you to start with lower funds, so you can use savings instead of borrowings to get started. They're certainly less hassle, and there are no holding costs (outside of the interest on any margin loan you get to invest).

But the capital gain you'll get from ASX property shares is likely to be smaller. Over the past five years, the A-REIT index has risen by only 7%.

So, investors who choose shares over bricks-and-mortar property might pick a few ASX growth shares for capital gains and some ASX dividend shares (perhaps including property shares) for reliable income.

Motley Fool contributor Bronwyn Allen has positions in Goodman Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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