Kempen Real Estate Update: REIT portfolios in the COVID-19 world
Equity markets around the word have swung wildly in the past weeks. Investors have been struggling to understand the economic damage the fast spreading COVID-19 might cause, as the number of cases continues to rise and governments step up measures to contain them. Policymakers have responded by cutting interest rates to prop up economic growth. Worries about long term economic growth have pushed the yield on 10-year US Treasury notes and German Bund to new lows.
Real estate stocks have not been immune to the sell-off as investors have struggled to assess the potential impact of the COVID-19 outbreak on the sector's demand drivers and net operating income (NOI) outlook. This will be especially true for the REIT subsectors that are more economically sensitive, more directly exposed to demand drivers as travel or events, catering to senior populations, or exposed to China and the inter-connected supply chain. But not all companies and sectors will be equally impacted and no doubt there will be winners.
It is hard to forecast the exact impact the COVID-19 outbreak will have on REITs as statistics are incomplete and constantly changing with new data points. All uncertainty aside, however, we have updated our valuation models with available information.
The different real estate clusters carry different operational gearing and have different exposures to COVID-19. Some clusters experience pressure like Hotels and Senior Housing whereas other benefit like Medical Office Buildings, Laboratory Office space, Datacenters and, to an extent, Logistics.
We have lowered 2020 net operating income (NOI) growth by 5-15% for most real estate companies. We assume a recovery in NOI growth after 2021. Consequently, net asset values (NAVs) are down by approximately 5% to 17%. More operationally geared real estate companies like Hotels, Senior Housing, and Leisure experience the largest fall in values. In general, the shorter the lease terms, the higher the operational gearing. Hotel leases can be cancelled in one day and storage and senior housing several weeks.
Including these NAV write downs, Asian and European real estate markets trade as of 17 March 2020 at approximately 25% discount to KCM NAVs at the moment. North America at approximately 22.5%.
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