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Will REITs bounce back?

16 Sep 2021 1 month(s) ago

What will happen to Real Estate Investment Trusts when there is a reopening?

One way to get exposure to property is to buy into Real Estate Investment Trusts (REITS). You can buy small units and trade them much more easily than buying or selling actual properties, which can only be transacted in large chunks.

Of course, these properties have been hammered during the ‘pandemic’. Macquarie is having a look at what international experience is pointing to for the likely performance of the Australian REITS.

“A key area of discussion post reporting season has been the re-opening thematic. To understand the duration of retail REIT outperformance around the reopening of retail we have reviewed the share price performance of retail malls in the UK, EU and US and compared this to respective industrial/logistics REITs.”

These are Macquarie's assessments of Australian REITS:

Macquarie looks at overseas jurisdictions, concluding that they initially got a bounce on re-opening, but then fell back:

UK “In the 60 days post the announcement of the UK roadmap to re-opening (22nd of February), retail mall landlord Hammerson outperformed industrial REIT SEGRO by 65%. However, in the 60 days post the relaxation of retail restrictions during May, Hammerson underperformed SEGRO by 16% and since ‘Freedom Day’ on 21-July, Hammerson underperformed SEGRO by 19%.

EU “In the 30 days post the announcement of the UK roadmap, EU retail REITs (URW and Klepierre) outperformed industrial REIT landlord SEGRO by 19%. Similarly, the retail REITs outperformed SEGRO for the 30 days post the announcement of the French roadmap to re-opening in May. However, 30-60 days post these announcements the retail REITs underperformed.

US Retail REIT Simon Property Group significantly outperformed industrial REIT Prologis in Jan/Feb (+32%). Since this date, Simon Property Group has underperformed Prologis by 19%, despite the most populous states of California, New York, Florida and Texas all re-opening through this period. Indeed, post California re-opening in mid-June, Simon Property Group has underperformed Prologis by 10%. Again, this is despite landlords announcing a strong rebound in sales (URW noted its US sales had returned to 100% of pre-COVID levels).

Macquarie says that: "while there are many factors that can influence share price performance, retail malls have tended to outperform on announcements or anticipation of re-openings, as opposed to the physical re-opening itself (despite strong sales reported by offshore mall landlords once reopening has occurred). In addition, moving from pandemic to endemic means learning to live with the virus, which may result in additional challenges for retail landlords."

Macquarie comes to the conclusion that looking at REITs’ fundamentals is the way to go. That means assessing revenue, income growth net asset backing and gearing, which is the conventional way to pick the good performers. In other words, business as usual rather than anything to do with the ‘pandemic.’


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