The ongoing global outbreak of the Coronavirus (COVID-19) pandemic has seen an extensive sell off permeate financial markets as investors grapple with concerns around how the drastic government and central bank responses to the outbreak will augur for global economic growth. The dramatic sell off in equities across the board has included property securities markets.
Global REITs, as measured by the FTSE EPRA/NAREIT Developed Index, have fallen -26.7% in USD terms in the March quarter. In terms of key regional markets, in the year to date US REITs fell -29.0% (USD), Developed European Property Securities (EUR) fell -25.8%, Australian (AUD) fell -34.4%, Hong Kong Property Securities (USD) fell -19.5% and Japanese REITs (YEN) fell-25.3%.
While there is a high degree of uncertainty around how COVID-19 will impact the real economy over the medium to long term, the virus outbreak has material near term implications for real estate markets.
Sectors likely to struggle
The tourism industry has been significantly impacted by the outbreak, with both international and domestic travel being severely depressed due to widespread travel restrictions put in place by governments. As a result of these measures, Hotels are likely to incur operating losses until the tourism industry picks up again.
Property sectors that are exposed to large congregations of visitors - such as retail - are also exposed to material near-term risks, due to reduced visitation and expenditure driven by government enforced ‘lock-downs’ and social distancing measures.
Social real estate sectors including childcare, aged care facilities and student housing, are also at risk of rising vacancies due to the outbreak.
Sectors to show resilience
While office buildings, self-storage facilities and residential apartments are not immune to the impacts of COVID-19, these sectors are likely to be very resilient.
Hospitals, data centres and logistical warehouses are all expected to be material beneficiaries of the pandemic.
Whilst the situation of the outbreak is continually evolving, we believe that many securities in the listed property sector have been materially oversold, as the extent of the re-pricing does not currently consider the long economic lives of many of these assets.
The major focus of the team has been to position the strategy* with the greatest emphasis being on balance sheet strength and refinancing risk over the next 3 years. The strategy has a debt to total assets ratio of 30%, an interest coverage ratio of 7.6x and low refinancing risk over the next 3 years.
Index return data is sourced from Factset.
All indices are FTSE EPRA/NAREIT except for the Australian index which is ASX200 AREITs.
*Strategy refers to the Colonial First State Wholesale Global Property Securities Fund ARSN 108 688 777
This material has been prepared and issued by First Sentier Investors (Australia) IM Ltd (ABN 89 114 194 311, AFSL 289017) (Author). The Author forms part of First Sentier Investors, a global asset management business. First Sentier Investors is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG), a global financial group. A copy of the Financial Services Guide for the Author is available from First Sentier Investors on its website.
This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs. Before making an investment decision you should consider, with a financial advisor, whether this information is appropriate in light of your investment needs, objectives and financial situation. Any opinions expressed in this material are the opinions of the Author only and are subject to change without notice. Such opinions are not a recommendation to hold, purchase or sell a particular financial product and may not include all of the information needed to make an investment decision in relation to such a financial product.
To the extent permitted by law, no liability is accepted by MUFG, the Author nor their affiliates for any loss or damage as a result of any reliance on this material. This material contains, or is based upon, information that the Author believes to be accurate and reliable, however neither the Author, MUFG, nor their respective affiliates offer any warranty that it contains no factual errors. No part of this material may be reproduced or transmitted in any form or by any means without the prior written consent of the Author.