Investors have witnessed one of the sharpest stock market sell-offs in history, bringing an 11-year bull market to a shuddering halt.
Fear has been building up since late January and has now reached a crescendo, resulting in a swarm of investors rushing for the exits.
During such unprecedented times, investors would naturally look for safe havens to park their money.
Up till the mid of March, real estate investment trusts (REITs) had seemed to offer just that — stability and an oasis of calm amid the onslaught of selling.
However, over the past week, REITs themselves were subject to a fierce wave selling.
REITs have seen their share prices sliced by between 20% to 40% in just a matter of days.
Even a stable healthcare REIT such as Parkway Life REIT (SGX: C2PU) has not been spared with its share price tumbling by 25% from S$3.50 to S$2.61.
Is this sell-down something that should concern investors?
REITs were richly valued
Investors should note that REITs were richly valued before the current sell-down, as measured by the dividend yield.
Many stable REITs with strong sponsors were trading at a dividend yield between 3% to 4.5%, lower than many of our local banks.
For example, Keppel DC REIT (SGX: AJBU) had a dividend yield of 3.2% at its peak share price of S$2.53. Its yield has now increased to 4.5% after its share price declined to S$1.76.
For Frasers Centrepoint Trust (SGX: J69U), it used to sport a dividend yield of 4% at S$3.04. Its yield has now increased to 6.1% after its share price declined 34% to S$2.00.
Mapletree Commercial Trust’s (SGX: N21U) dividend yield used to be 4.2% at a share price of S$2.26. After falling 23% to S$1.73, its dividend yield has now increased to 5.5%.
From the above examples, it can be seen that dividend yields for REITs across the board have now risen into the 4.5% to 6% range. This level is more in line with long-term average yields for the REIT asset class.
Physical real estate
The next concern that investors may have is whether REITs may go bust.
REITs have traditionally relied on debt and borrowings to fund their operations and distribution per unit.
During the Great Recession, as the financial system seized up, some REITs faced problems refinancing their debt.
In the end, some had to conduct rights issues that were massively dilutive to unitholders to survive.
However, the current crisis involves a pandemic relating to a virus called Covid-19. The financial system is still working normally and REITs are not facing the risk of not being able to refinance their loans.
Investors should also remember that REITs own physical real estate that acts as collateral for their loans. These physical properties will hold some value even during a major recession.
Muted business performance due to Covid-19
That said, the growing crisis relating to Covid-19 will have some knock-on negative impact on REITs.
After all, physical properties do not exist in a vacuum.
Hospitality REITs will face the heaviest financial hit among all the REIT sub-classes, as they operate hotels and serviced residences.
Many hotels around the world have seen occupancy rates plummet due to travel restrictions and the shutting off of borders.
For retail REITs, footfall at malls will suffer and tenants will be under stress due to social distancing measures and lockdowns in certain countries.
Industrial REITs may also face pressure from tenants whose supply chains have been disrupted by the spread of the virus.
Commercial REITs could see a slew of tenants requesting for rental relief as their underlying businesses are hit by lockdowns and muted demand.
In short, we should expect most REITs to experience financial pressures exerted by the Covid-19 crisis.
Get Smart: Some investors need liquidity
Although REITs will be impacted to some degree by what’s happening in the world, investors should still be able to sleep soundly.
REITs own physical real estate that holds its value even during crises.
Furthermore, the bulk of rental income should remain stable, allowing REITs to continue paying out distributions, albeit at a reduced level in some cases.
During market crashes, there will always be investors who desire liquidity to raise cash quickly, whether for opportunities or to cover losses from other asset classes.
As REITs are one of the more liquid asset classes in the stock market, they will inevitably face significant selling pressure from investors who are looking for the exits.
Long-term investors in REITs should just sit tight and wait out the storm.
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Disclaimer: Royston Yang owns shares in Keppel DC REIT.