About 40% Of REITs May Not Have Earnings Issues (Magazine)

By Victor Yeung, Chief Investment Officer, Admiral Investments

Residential REITs claim three of the current top seven REITs on the GPR REIT 250 list.  As of June, none of the top five REITs in the index is office or retail.

Global REIT prices have dropped by about 20% year-to-date.  As a result, dividend yield across the board has now become more attractive. The dividend yield of the GPR Global REIT 250 index has widened from 4.0% on December 31, 2019, to 4.8% on June 30, 2020, while the GPR/APREA Investable REIT Index is trading at 4.7%, versus 4.1% at the end of 2019. 

Dividend Yield (%) End of June 2020 End of December 2019
GPR Global REIT 250 4.8 4.0
GPR/APREA Investable REIT 100 4.7 4.1
GPR/APREA Investable Australia 5.0 4.6
GPR/APREA Investable Japan 4.5 3.5
GPR/APREA Investable Singapore 5.1 4.6
GPR/APREA Composite Hong Kong 4.5 3.4

REITs are characterised by relatively long-term lease contracts, which should provide a level of income certainty during troubled times. In theory, a stable income flow should appeal to investors, especially when the cash pay-out of some other forms of investment have been reduced.  

Thus, the natural question is whether the upcoming dividend stream is secured, and this is largely dependent on how long the Covid-19 pandemic lasts.  Because of structural similarities, Covid-19 was often compared to SARS when public policymakers first commented on the virus a few months ago.  Since the SARS epidemic started in the winter of 2003 and dissipated by summer, the first response for Covid-19 had primarily been concentrated on keeping the economy intact until summer.  

Covid-19 is unlike SARS

However, in recent weeks, the coronavirus has made a comeback in several countries. This suggests that Covid-19 is not following the trajectory of SARS, and economies will need to resume while policymakers keep the spread of the virus under control.  Under this new assumption, it is worth looking at the REIT universe to identify the rental trends of different property types.  

While retail and office have long been seen as the traditional property types, none of the top five REITs in the GPR REIT 250 index is office or retail REIT. Of the top ten, only 2 REITs are from these traditional property types. From home office arrangements to web retailing and online meetings, the pandemic has incentivised companies to adopt online services that could impact the traditional real estate sectors. 

COVID-19 Affects Different Property Types Differently

The longer the Covid-19 pandemic lasts, the more accustomed the society will be with the virtual economy, benefitting some real estate types depending on the nature of the demand. For example, logistics assets will facilitate web retailing. Data centres everywhere will expand to host increased traffic from working and meeting from home.  

Net Winner
  • Logistics
  • Data Centres
Neutral
  • Residential for rent
  • Other infrastructure
Minor Losers
  • Hotels (leased to operators)
  • Business Parks
  • Suburban offices
Sectors concerned
  • Traditional retail
  • CBD offices
  • Hotels on management contract/percentage leases

A second group of assets will see a more neutral impact from Covid-19. U.S.-styled residential REITs, for example, target the less well-off segment, and their performance may be counter-cyclical.  Thus, it is no surprise that residential REITs claim three of the current top seven REITs on the GPR REIT 250 list.  Other REITs, especially the ones tied to government contracts, should also see their earnings protected despite a weakening global economy. 

Challenges seen for retail and office sectors 

The retail and office sectors could see some headwinds for the remainder of 2020, but even then, some sub-sectors will see better fortune than others.  For instance, working from home could reduce the location premium of the top districts, narrowing the rental premium between a market’s top and secondary nodes.  In Hong Kong, Central rents are indeed falling compared to secondary nodes in Island East and Kowloon East.  This would suggest that within office REITs, those focusing on business parks and suburban offices should see better performance.  

At the global REIT level, about 18% are in sectors we classified as “net winners,” and a further 25% are in the “neutral” category. Thus, more than 40% of REITs should not see significant earnings issues through this challenging period.  

However, each REIT market has a different mix of property types.  Some newer markets may not have any logistics and data centre REITs. In other words, in the short term, the most matured and diversified REIT markets may see their dividend streams better protected than the smaller, newer markets. 

Note that both the Chinese and Indian governments are pushing infrastructure as a REIT sub-sector. Given their relative strength in this environment, investor acceptance could be substantial. It is often said that crises tend to accelerate long-term changes, as stakeholders need to adapt to the new realities quickly. 

We think that the REIT sector is likely to see major changes, and net winners will see a funding advantage, allowing them to continue their expansion. Investors with the capability could investigate the winning sectors in detail, and more passive ones could invest in ETFs and ride on the resulting index changes.  

 About the author:

Victor Yeung, Chief Investment Officer, Admiral Investments

Victor Yeung is Hong Kong-based Admiral’s founding managing partner and chief investment officer.  From 2007 to 2013, Victor was with LaSalle Investment Management, where he managed the Asia Pacific portion of the USD 10 billion Global Real Estate Securities programme and eventually became its Managing Director, Asia Pacific Securities.   He also previously worked for Morgan Stanley and American Express. Victor attended the Massachusetts Institute of Technology (MIT).

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