The COVID-19 impact is being felt in Australia’s housing market, where prices fell for a third straight month in July. UBS analysts, led by Pieter Stoltz, have assessed how these property blues will impact real estate-exposed ASX stocks.

The analysis forms part of some detailed research released this week from the UBS equities desk to accompany August reporting season.

Looking at the macro environment, the analysts pointed to the ongoing decline in auction clearance rates, which are “consistent with weaker housing prices”.

The also noted sluggish activity in the Australian Performance of Construction Index (PCI), which ties in with weakness in new building approvals.

Together, those factors could have a material bearing on stocks that derive earnings from residential construction.

Breaking it down

Taking that into account, UBS then separated industry-linked stocks into two categories; direct or indirect exposure to the housing market.

Building and materials stocks facing a challenge from the macro headwinds outlined above were deemed to have direct exposure.

For companies with indirect exposure, UBS flagged discretionary retailers who could face a threat from a negative “wealth effect” — the correlation between falling house prices and a reduction in consumption (particularly for household items).

Below is a summary of the stocks with direct exposure, with a corresponding Buy, Sell or Neutral rating applied by UBS.

We’ve also included the bank’s forecast stock return (FSR), which it calculates as a combination of “price target upside and gross dividends per share”:

Code Company UBS Rating FSR
CSR CSR Ltd Buy 37%
BIN Bingo Industries Buy 36%
BLD Boral Buy 17%
JHX James Hardie Industries Buy 14%
DHG Domain Australia Buy 5%
FBU Fletcher Building Buy 8%
REA REA Group Neutral -3%
ABC AdBri Ltd Sell -5%
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Topping the list in terms of FSR was building products company CSR Ltd (ASX:CSR), which UBS said could achieve an upside share return of 37 per cent.

After falling by around 40 per cent during the COVID-19 selloff, shares in CSR jumped to a post-crisis high of around $4.50 before falling back to $3.60.

The analysts then selected 14 stocks with indirect exposure to falling house prices via a pullback discretionary spending.

And for that cohort they also leaned on the bullish side, with nine Buy ratings and five Neutral picks, and no Sell calls:

Code Company UBS Rating FSR
FLT Flight Centre Buy N/A
MYR Myer Buy N/A
CTD Corporate Travel Mgmt Buy 183%
WEB Webjet Buy 78%
AMA AMA Group Buy 45%
HVN Harvey Norman Buy 14%
ASG Autosports Buy 9%
OMV Premier Investments Buy 5%
ADH Adairs Buy -2%
SUL Super Retail Neutral 4%
GUD G.U.D. Neutral 3%
JBH JB Hi-fi Neutral 0%
WES Wesfarmers Neutral -10%
KGN Neutral -35%
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Among the stocks in the indirect group, UBS put a big upside premium on Corporate Travel Management (ASX:CTD), which it said could more than double if everything goes its way.

They were also bullish on Webjet (ASX:WEB) and industrials company AMA Group (ASX:AMA). But after running hard in the wake of the post-COVID online sales frenzy, they were less optimistic that (ASX:KGN) could continue its strong run.