REITS – Is all the bad news priced in?
Ed Murray
Ed Murray
Senior Stockbroker

The impact of COVID-19 is having, and will likely continue to have, a negative effect on all property sectors over the coming months as the economic impact is reflected in prices, yields and Net Asset Values (NAV’s). REITs or property funds with exposure to Hotels, Retail, Leisure and Student accommodation might expect to bear more of the brunt of the economic fallout from the virus than commercial or residential property. Many open-ended property funds pulled down the shutters on redemptions, prior to the real impact from the virus became known. Aviva and Friends First in Ireland gated their property funds in February, as they were unable to meet investors demands to return their cash, some would attribute this to the funds exposure to the retail sector, as online shopping continues to grow. Others attributed this to the sale of Green REIT, and the fortuitous timing of Stephen Vernon and Pat Gunne to call the top of the market. In the UK, the Kames Property Income fund became the first open-ended fund to suspend redemptions since the coronavirus outbreak and comes just three months after M&G Property gated amid concerns over liquidity. The Kames decision was quickly followed by a raft of other property funds in the UK following suit. Many property fund managers are citing “material uncertainty”, or the inability to provide accurate or reliable prices for the funds underlying assets. Needless to say, investors aren’t too happy, and are seeking answers as these latest moves are trapping over €14 billion of their funds.

Government policy measures are key to supporting economies in these very challenging times. One of the key objectives for governments, while supporting industry and SME’s, is getting people back to work. Some of the latest data we’ve seen is stark and projections makes the impact of the Global Financial Crisis (GFC) pale in significance. The recent collapse in Services PMI’s points to a larger and faster shock to global economies. The potential impact remains unknown, which increases the uncertainty across all asset classes and their fair values. In particular, the less liquid property sector, with little or no transactions taking place, it is hard to get a sense of the potential write-downs. Through the GFC, country Services PMI readings took 18 months to two years to bottom out, but were a lead indicator for the direction of markets and fall of asset prices. For a quick video and explanation on PMI data and its importance, please click on this link to a YouTube video from the WSJ.

Country Period Peak Services PMI Period Trough Services PMI Decline Months
UK Jun-07 52 Dec-08 38.4 13.6 18
France Jun-07 56.7 Mar-09 37.9 18.8 21
Germany Jun-07 53.9 Jun-09 40.7 13.2 24
Spain Mar-07 54 Mar-09 34.8 19..2 24
Italy Jun-07 51.2 Jun-09 42.2 9 24

Source:IHS Market

In March and now April, Services PMI data globally has plummeted. A reading below 50 indicates that activity has fallen, and the lower the reading, the larger the fall. Major European economies have seen record falls, to levels below those seen in the GFC. April’s readings, while in the eye of the storm, tell us that everything has dis-improved month on month, but critically do not tell us by how much. We as shareholders or potential investors are still in the dark, and this uncertainty will continue to weigh on sentiment towards property prices or question the NAVs of REITS.

Country Comment March readings April readings
Eurozone All time low 29.7 13.5
Ireland 3rd lowest on record 32.5 TBC
France Record contraction 27.4 10.4
Germany Record drop 31.7 15.9
UK Record fall 34.5 12.9
US Record fall 40.9 27.4

Source:IHS Market

Businesses indicate that layoffs are happening at a record pace in April, indicating that short term work schemes cannot absorb all of the labour market shock, and that global unemployment is likely to rise substantially. Service sector jobs were slashed at the steepest rate yet witnessed by the survey, while the drop in manufacturing payrolls was the sharpest since April 2009. In some cases, the employment decline reflected furloughed workers, but even if these workers are excluded, the fall in employment was still amongst the steepest ever recorded by the survey. The question is how quickly this might abate, and how quickly activity will pick up as lockdown restrictions are partially lifted across Europe. China has begun to re-open following their lockdown in February, and some Co’s particularly in the luxury goods and cosmetic space (LVMH & L’Oréal) have seen a positive rebound in this region.

The question we ask ourselves, given the few transactions in the property market year to date, what are the quoted property stocks telling us? In this new world, it is likely that some firms will allow an increased level of remote working, reducing their office footprints and costs. While this reduction should be offset to some extent, as employers seek to provide greater physical distance between employees for health purposes, what does that mean for future office space demand? Certainly, the open-ended funds that have been gated will need to be reviewed, reflecting the economic risks. Below I have outlined two of the local REITS listed in Dublin, along with the Schroder European REIT that is listed on the UK market. Each one is different, in terms of sector exposure, regional/country exposure and currency. Each have fallen between 30% to 42% from their 52-week highs and are trading at decent discounts to their last reported NAV’s, particularly the Schroder European REIT. In a low interest environment, property REITs are generally deemed defensive by nature given their income streams or dividend yields. While the listed REITs are offering attractive yields of between 3% and 5%, are the last reported NAVs reflecting the true economic risks to property values?

Hibernia REIT IRES REIT Schroder European REIT
Market Cap (€000) €750m €600m €103m*
% Sector Exposure of Rental Income
Office 90% 0.0% 40%
Residential 10% 100% 0.0%
Retail 0.0% 0.0% 25%
Industrial 0.0% 0.0% 20%
Data Centre/Mixed Use 0.0% 0.0% 15%
Portfolio Occupancy rate 34 Properties 88% 43 Properties - 3885 Units 98% 13 Properties 94%
% of Rental Income by Country
Ireland 100% 100% 0%
France 0% 0% 43%
Germany 0% 0% 22%
Netherlands 0% 0% 23%
Spain 0% 0% 12%
Loan to Value 'LTV' LTV of 16% LTV target 45% LTV of c.30%
EPRA NAV €1.76 €1.55 €1.37/£1.21*
Indicative Dividend Yield 3.50% 4.5% 5.5%
Current Share Price €1.18 €1.15 £0.67p
Discount/Premium to NAV 32.80% 25.81% 45.00%
52 week high €1.56 €1.83 £1.19
52 week low €0.75 €0.90 £0.59

* Euro values based on €/£ Rate @ 0.88

Source:Company Reports April 30th 2020

 

Ed Murray is a Senior Investment Manager with Cantor Fitzgerald Ireland.

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