COVID-19 has brought both a health crisis as well as an economic one.
There has been significant economic pain that accompanied the widespread lockdowns and border closures.
Traditionally, physical real estate is viewed as a reliable investment.
However, the current crisis is unique in that it is vastly different from the previous downturns.
Investors may wonder if real estate businesses can remain resilient.
The answer, however, is not so simple.
As real estate encompasses a variety of sub-types and use cases, the implications for real estate companies are varied.
With that in mind, I thought it would be useful to segment the discussion into broad categories to help understand how each segment is coping with the economic fallout.
The quintessential real estate vehicle is, of course, the real estate investment trusts, or REITs.
The pandemic has affected the different types of REITs in different ways.
By far, the most severely impacted REITs have been the hospitality ones, such as ARA US Hospitality Trust (SGX: XZL) and CDL Hospitality Trust (SGX: J85).
With demand plunging for hotels due to travel restrictions, occupancy rates for hotels have plummeted.
The recovery could be slow as the second wave of infections around the world threatens to extend the closures indefinitely.
Back home, retail REITs such as Frasers Centrepoint Trust (SGX: J69U) have suffered from plunging footfall when Singapore’s circuit breaker measures kicked in.
The need to dole out money for tenant relief measures meant that retail, commercial and even some industrial REITs faced a steep decline in distribution per unit, even though distributable income may not be adversely affected.
However, healthcare REITs such as Parkway Life REIT (SGX: C2PU) escaped unscathed, while niche industrial REITs such as Keppel DC REIT (SGX: AJBU) have even thrived.
The large property developers in Singapore, such as CapitaLand Limited (SGX: C31) and City Developments Limited (SGX: C09), or CDL, are also facing tough challenges.
CapitaLand saw its revenue dip by 4.9% year on year when it released its half-year 2020 earnings.
Profit after tax and minority interest plunged by 89% year on year, though.
CDL saw a steeper fall in revenue, down by 32.8% year on year, while profit after tax plummeted by 99.1% year on year to just S$3.1 million from S$362 million a year ago.
The key reasons for the huge drop in net profit should not worry investors too much.
For CapitaLand, the first half of 2019 saw the recognition of S$593 million in fair value gains on investment properties. There was no such gain recorded in the first half of this year.
Fair value losses of S$555.2 million due to investment properties held by CapitaLand Mall Trust (SGX: C38U) and CapitaLand Commercial Trust (SGX: C61U) led to further drag on profits.
These adjustments were all non-cash in nature and do not affect the cash generation ability of the group.
For CDL’s case, its hotel operations were responsible for its poorer showing, with 28% of the group’s 152 hotels temporarily closed. Also, global occupancy rate fell to 39.4%.
Real estate brokers
Finally, we take a look at how real estate brokers have fared this year.
The two largest ones in Singapore are APAC Realty Ltd (SGX: CLN) and PropNex Ltd (SGX: OYY).
For the first half of 2020, APAC Realty reported a 6% year on year increase in revenue.
Net profit after tax rose 52% year on year to S$7.8 million.
The better performance was attributed to higher levels of new home sales despite the suspension of viewings during the circuit breaker.
The group has maintained its interim dividend of S$0.0075.
PropNex reported a better result, with first-half revenue rising 45.2% year on year to S$241.5 million.
Net profit more than doubled from S$5.7 million to S$14.8 million.
The surprisingly good performance was due to higher commission income from a higher number of real estate transactions.
So, it seems that the real estate brokers are relatively insulated from the economy’s troubles.
Pent-up demand for physical property will continue to support their business even though the crisis has yet to abate.
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Disclaimer: Royston Yang owns shares in Keppel DC REIT.