REITs seem to have been hit harder than other shares in the market by the coronavirus outbreak. At first, it might seem a little odd, given that REITs are viewed as an alternative to fixed-interest instruments such as bonds….
…. And with interest rates likely to stay lower for longer, REITs should be in greater demand than before. After all, many investors prefer them to bonds because they could earn more from their quarterly distributions than, say, through half-yearly coupon payments.
But now there are concerns that REITs could suffer along with the rest of the global economy as lock-downs could choke off consumer spending at malls, as disruption to supply chains could interrupt operations at logistics centres, and as home-working could change the need for staff to ever step foot in offices ever again.
All that is possible, but unlikely.
We might put off going to shopping centre in the short term. But the pull of social interaction could be too strong for even die-hard hermits or internet shoppers to resist. Meanwhile, manufacturers will find ways to repair their broken supply chains, and working from home could be, at best, a pipedream for many.
In the short-term, some REITs could be impacted by the viral outbreak. Some poorly capitalised tenants could be crushed by a loss in revenue. That could affect the rental income of some REITs, which, in turn, could have less money to distribute to unit holders.
But REITs could prove to be more resilient than we think, provided their interest covers are comfortable. So, focus on those that can service their loans adequately, have a broad base of tenants, and have the capacity to borrow more if necessary.
Two things must happen at the same time to hurt a good REIT – an economic downturn and a shortage of credit. The first is possible as the coronavirus works its way through the global economy. But the second seems improbable, given that central banks and governments are doing everything it takes to avoid a fallout.
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Disclosure: David Kuo does not own shares in any of the companies mentioned.