REITs have traditionally been recognised as a bastion of safety.
The dividends that this asset class have been doling out has weathered many a storm over the years.
However, the COVID-19 pandemic has called the REIT business model into question.
Many businesses across a wide swath of industries such as hotels, tourism and retail have been badly impacted.
As tenants, such businesses will have trouble coughing up the rent to pay the REIT manager, resulting in a decline in cash flow for REITs.
Some tenants may even go bust if the situation does not improve.
These troubles have resulted in a sharp sell down in REITs back in February and March.
However, in the last two months, share prices of REITs across the board have risen sharply.
The big question here is — has all this been part of a real rally or just the beginning of a false dawn for REIT investors?
Drastic DPU cuts
Lockdowns and social distancing have sharply reduced foot traffic into malls.
Retail REITs have had to dole out extensive tenant support measures to assist their struggling tenants.
These packages have led to drastic cuts in distribution per unit (DPU) for REITs such as SPH REIT (SGX: SK6U) and Frasers Centrepoint Trust (SGX: J69U), with year on year DPU declines of 80% and 48.7%, respectively.
Even industrial REITs have not been spared.
ESR-REIT (SGX: J91U) has slashed its DPU for the first quarter of 2020 by 50.3% year on year to S$0.005.
Hospitality REITs, being at the forefront of the pandemic, have suffered as well.
ARA US Hospitality Trust (SGX: XZL), which owns a portfolio of hotels in the US, reported that net property income for the first quarter plunged 68.2% year on year.
Share prices rebounding
Amid all the doom and gloom, it seems like the trouble has just begun for REITs.
However, despite the odds, REITs have staged a stunning recovery of late.
Frasers Centrepoint Trust is now 58% above its low, while SPH REIT has rebounded by 34% as well.
Industrial REITs such as Frasers Logistics and Commercial Trust (SGX: BUOU) have risen sharply by 82% from the lows reached in mid-March.
Even Ascott Residence Trust (SGX: HMN), a hospitality REIT, has jumped nearly 66% from its nadir this year.
Meanwhile, news on COVID-19 has been getting better.
Some countries, such as New Zealand, has seen zero active cases of the virus and is starting to lift its lockdown measures.
The US is also starting to open up its economy despite there being a high number of deaths.
With more knowledge and understanding of how COVID-19 functions, many countries have also been able to cope better.
Healthcare systems are no longer under a strain as they were back during the February to April period.
And this too, will pass
Even in Singapore, the “circuit breaker measures” that lasted from 7 April till 2 June have been partially lifted.
The country is transitioning into Phase I of “Safe Re-Opening”.
Across the Causeway, Malaysia has officially ended its “Movement Control Order” and will enter a “recovery phase” from now till 31 August.
Although a vaccine has yet to be developed, all the above news is positive as they provide optimism that the virus can be successfully contained and that the pandemic is nearing an end.
Economies can then open up sooner than expected, and people will then be allowed to enjoy free movement again.
For REITs, the belief is that this crisis shall eventually pass and that tenants support measures will have a temporary effect on DPU.
The positive sentiment and growing realisation that the crisis is not as bad as it was once envisaged have, collectively, pushed up REITs’ share prices.
Get Smart: Quality assets retain their value
There is a valuable lesson to learn here.
It is that high-quality real estate assets will continue to hold their value, even in a crisis.
REITs with strong, well-located assets may suffer temporary dips in net property income and DPU but will be able to bounce back once the crisis has passed.
We believe that most of the horrible news has passed and that this wave of optimism is justified.
Although an economic recovery may still take many more months, the rally could be a real one and we should not expect REIT share prices to revisit their lows in March again.
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Disclaimer: Royston Yang owns shares in Frasers Logistics and Commercial Trust.