From the outbreak of the coronavirus, financial markets never priced the virus as merely a touch of seasonal flu. While the disease was confined to China, they were slow to appreciate its full global economic significance. However since the proverbial penny dropped on 21 February, markets have been discounting a global demand and supply shock and the resulting plunge in company earnings, including the earnings of listed real estate investment companies.
The outbreak and its spread from China to become a pandemic has wreaked havoc on demand in industries including hospitality, retail/malls and offices. Logistics might benefit from increased e-commerce, but could also suffer amid delivery and supply chain problems.
So what is next for listed real estate?
The truth is that we are uncharted territory. Given the unknown quantity that the virus represents for not only global public health, but also in terms of its implications, investors have struggled to assess the consequences for supply and demand and the uncertainty has caused equity markets to plummet. Capital market prices have moved in ways not seen since late 2008 in the aftermath of the collapse of Lehman Brothers. Global real estate investment trust (REIT) markets have followed.
Shelter from the storm?
The sell-off drove investors to safe havens including US Treasury bonds, driving yields to all-time lows, but the prospects of cheaper financing failed to support REITs. Usually perceived as a more defensive sector, global REIT markets did not escape unscathed.
Although other traditionally defensive sectors such as utilities and infrastructure were beaten up less than consumer discretionary and hospitality, global real estate and property equities lost more 28% between 20 February and 12 March.[i]
At the time of writing, the worst performing markets in the REIT sector were Italy – at the heart of the outbreak in Europe – and the Netherlands. Interestingly, Switzerland was the best performer in Europe despite its proximity to Italy and the local outbreak of the disease. This can be seen as a reflection of Switzerland’s reputation as a safe haven in a time of crisis. Globally, Hong Kong and Singapore were the least sold-off markets, perhaps reflecting the improving regional outlook now that the disease is viewed as a decreasing risk in China.
Exhibit 1: Performance of global real estate markets – countries (top) and sectors (below) from 20-2-2020 to 12-3-2020 (total return; in EUR)
In the worst affected travel and leisure industries, hotel REITs were down by 40% globally since the outbreak. Storage was the least affected, while residential also held up reasonably well. In the US, the similar picture was similar: storage and residential did better than lodgings, healthcare and malls (see exhibit 2 below).
Exhibit 2: Performance of US real estate sectors from 20-2-2020 to 11-3-2020
Source: Bloomberg, 12-3-2020
What could break the circuit?
We are in unchartered territory trying to gauge the impact of a pandemic on the world’s economy and by extension global real estate markets.
When a recovery does begin, we would expect some of the sell-off to unwind, but it is unclear that it will be a simple case of mean reversion. We would caution against simply assuming that the most beaten-up REIT sectors and stocks will lead any bounce.
Expect sustained volatility in markets as investors, unable to predict the path of the virus, watch until the authorities can demonstrate that they have the coronavirus under some measure of control.
[i] Source: Bloomberg, FTSE EPRA Nareit Global Developed Return Index (EUR) 20-2-2020 to 12-3-2020
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.