Global listed property securities were hit hard in 2020, with developed market listed property (ex-Australia) down 13.6% over the year in Australian dollar hedged terms. Moreover, the Covid-19 pandemic exacerbated and accelerated secular trends, with a gulf between sector winners and losers. Overall, global listed property remains beaten down, but the recovery is underway, as evidenced by the December quarter’s return of 10.5%.
Stricter lockdown conditions in the UK, Germany and other parts of Europe, as well as tighter restrictions in parts of the US (especially California), have stymied the recovery in some sectors, but news of vaccine rollout plans have counterbalanced the outlook.
The Industrial/Logistics sector has outperformed during the Covid-19 downturn and is expected to continue to grow off the back of the growing e-commerce trend. Other sectors benefiting from the ‘new normal’ include Data Centres, Storage and Manufactured Housing, which have grown materially over the last decade, and are expected to continue to outperform based on the rise of the digital economy and favourable demographic changes.
Residential rental sub-sectors (apartments, multi- and single-family housing, and student housing) are also favoured given the consistency of income and emerging preferences for rental over home ownership in some countries. Travel restrictions though are preventing international students from taking up residence in some countries. However, the above sectors are trading at a premium in contrast to the underperforming sectors. Hotels/Lodging earnings are expected to recover slowly in line with international travel, but stocks could rebound more quickly depending upon when Covid-19 vaccines become available.
On the flip side, tenants of traditional ‘bricks and mortar’ retail property were already under pressure pre-pandemic. Middle-placed assets (between fortress malls and food-based neighbourhood centres) are see earnings under pressure from lower effective rents and store closures. While earnings have recovered as restrictions have lifted, long-term structural issues mean asset values may come under further pressure as rental growth weakens and capitalisation rates rise.
The US experience has been marked by the permanent closure of well-known chainstore branches and iconic brands filing for bankruptcy. With the holiday season over, a further wave of bankruptcies is expected. The pandemic has prompted investors to diversify into alternative assets such as childcare, healthcare, and data centres, which are less tied to the broader economy than mainstream commercial sectors and office space.
Of course, not every sector has fared worse under the pandemic. The growth of online shopping, video streaming and data networking is driving demand for data centres, while the rollout of 5G networks is spurring demand for cell tower infrastructure and roof space. Industrial warehouses are at the centre of the online shopping phenomenon, enabling fulfilment of home delivery. In the US, the urban exodus that has hurt apartments has been positive for single-family rentals, which are attracting residents seeking more space.
While working from home arrangements may pose a risk to longer-term Office demand, there is also an argument that social distancing requirements could offset this trend to some extent. Meanwhile, a drop in demand for office space has seen sub-let availability surge. Structural changes within office markets will emerge on a local level as individual markets adapt to underlying demand and supply, with central business districts potentially losing out to more decentralised areas.
Most global REITs still offer attractive dividend yields of 3.3% to 5.8% p.a. and an above long-term average premium relative to bonds (between 3% and 5%) across all markets. For rental focussed REITs, the outlook is underpinned by existing tenants on long leases with in-built rental growth. REITs with large funds management exposure may hold up well (based on ongoing fees), but those with high development exposure are more susceptible in weaker market conditions.
Balance sheets are in good shape and many REITs have raised equity capital in order to ensure they can withstand potential reductions in valuations impacting on debt covenants. Gearing is manageable (LVR of approximately 30%), interest rates are low (between 2% and 3%) and REITs have a more conservative payout ratio on their corporate earnings component.
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