REIT all about it
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    REIT all about it

    Cameron McCormack, Manager - Investments
    19 October 2020

    The recovery in equity markets, from the sudden and severe drop in March, has been remarkable but it has not been uniform.

    International real estate investment trusts (REITs), as an asset class, was hit hard and the recovery of the market benchmark, the FTSE EPRA Nareit Developed ex Australia Rental Index AUD Hedged, has not yet matched international equity markets.

    Australian investors remain wary of companies with revenues tied to economic activity such as retail, which dominate the local market, and have been the hardest hit as a result of restrictive lock-downs.

    It’s important to remember that international REITs are a far more diverse category than Australian REITs, including sectors such as healthcare, self-storage and data centres. Many of these companies’ operations have continued to hold-up well during this period and thus represent an opportunity.

    Rent collections too have started to improve and we think this has yet to be reflected in prices. Additionally, we believe that in time, office and industrial use will return to pre-COVID-19 levels which will see a rebound in these assets too.

    REIT all about it! With market participants expecting continued low rates and a low growth environment as the global economy emerges from this crisis, now could be the time to set your portfolio to rebuild and allocate a portion to listed international real estate securities.

    Global property’s rental returns green shoots

    When markets retreated in March, international property was among the worst sectors hit. While equities have led a recovery, international property has lagged.


    Figure 1: 2020 calender year to date index performance
    imageuhwy.png
    Source FTSE, 31 Dec 2019 to 12 October 2020. Rebased to 100. Indices used, International Property: FTSE EPRA Nareit Developed ex Australia Rental Index AUD Hedged - results assume immediate reinvestment of all dividends and exclude costs associated with investing in the ETF and taxes; Global equities: MSCI World ex Australia Index; Australian equities: S&P/ASX 200 Index. You cannot invest directly in an index. Past performance is not a reliable indicator of future performance.

    As you would predict, retail and hotels have been among the worst hit sectors in international real estate despite the fact there is evidence rental collections are improving. 

    Figure 2: International property sub sector year to date performance
    imagetools2.png

    Source: Bloomberg, Facstet; 31 Dec 2019 to 30 September 2020.


    Figure 3: Rental reciepts improving - % of Pre-COVID Rent Collection (USA)
    image8t6y.png
    Source: FTSE, NAREIT.

    With international property returns being so strong for most of the last decade, value opportunities have been hard to come by. Likewise, investors requiring income from their portfolios had a difficult time given the downward trajectory of interest rates. With most economies experiencing low or negative real rates and central banks using unconventional programs in order to stimulate their economies, income investors will have an even harder time as the economy recovers. Against this backdrop, international property can provide both a value and income opportunity.

    International property is now at its cheapest level in 11 years, and the dividend yield has remained steady. Despite falling yields elsewhere you can see in figure 5, the dividend yield on the REIT Index is relatively high at 4.54% as at 30 September 2020. The 12-month trailing yield rose significantly in March 2020 due to the fall in asset prices and while there has been some REITs that have reduced dividends, we believe a large cohort will not do this, meaning we still anticipate a reliable and attractive income stream.

    Figure 4: International property index price to Net Tangible Asset Value (NTA)
    Price relative to value of equity value. Lowest point in 11 years

    imagezhizs.png
    Source: Bloomberg as at 30 September 2020 International property index is FTSE EPRA Nareit Developed ex Australia Rental Index AUD Hedged. 

    Figure 5: 12 Month Trailing Dividend Yield
    International property index dividend yield has remained steady despite falling interest rates and bond yields
    imagerydmj.png

    Source: Indices used - MSCI World Index is MSCI World ex Australia Index, REIT Index is FTSE EPRA Nareit Developed ex Australia Rental Index AUD Hedged, US Govt Bond 10 Yr yield is US Gerneric Govt 10 Yr (USGG10YR Index). You cannot invest directly in an index. Past performance of the REIT Index is not a reliable indicator of future performance of REIT. Trailing dividend yield is not a guarantee of future dividends payable from REIT.

    While there has been some pullback, we think REITs still have a long way to go, especially in the context of previous REIT rallies. Compared to the most recent rallies in the aftermath of the GFC and the various debt crises, figure 7 shows that REITs have better fundamentals emerging from COVID-19.

    Figure 6: Analysis of historical REIT rallies
    imagezlris.png

    Source: Bloomberg Morgan Stanley Research. Index is FTSE EPRA Nareit Developed ex Australia Index AUD Hedged.

    Figure 7: Leverage – Debt / Assets
    Leverage still well below GFC levels
    imagegts8e.png

    Source: Bloomberg, as at 30 September 2020 Indices used: MSCI World Index is MSCI World ex Australia Index. REIT Index is FTSE EPRA Nareit Developed ex Australia Rental Index AUD Hedged. You cannot invest directly in an index. Past performance is not a reliable indicator of future performance.


    Diversification is key

    It important to remember US, Europe and Asia offer real estate investment opportunities not readily available in Australia, including lodging/resorts, healthcare, self-storage and data centres.


    Figure 8: Global Property Sector breakdown
    FTSE EPRA Nareit Developed ex Australia Rental Index AUD Hedged (%)
    imagexvzc.png

    Figure 9: Australian Property Sector breakdown
    S&P/ASX 200 A-REIT Index (%)
    imagetools6.png

    Source for Figures 8 and 9: FTSE, Factset as at 30 September 2020.


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