Grant Berry

The Australian Real Estate Investment Trust (AREIT) sector may have taken a COVID-19 hit however short-term implications should not deter investors from taking a longer-term view of the market, says Grant Berry, SG Hiscock & Co portfolio manager of AREITs. 

“REITS are now in a far better position than where they were at the start of the last economic crisis, pre GFC – they’ve got lower gearing, more diversified debt, longer tenure and higher interest cover ratios.

“Real estate is also a real asset, with a growing income profile over time, and this will always prove attractive for many investors. Therefore, they are well positioned to recover from the current downturn.

“The extent of the recent REIT sell-off was surprising but, having said that, we had been cautioning for some time on the late cycle pricing and fundamentals. We had been pushing up capitalisation rates and assigning lower multiples for other income sources, so while the global shutdown impacted REITs, it wasn’t through inappropriate gearing up, owning poor assets or embarking on other non-core activities,” he said.

Furthermore, monetary policy and extensive fiscal stimulus measures announced by the Federal Government over recent months has also provided support to the REIT market. The improvement in the COVID-19 situation in Australia is ahead of expectations, which has led to the opening up of the economy, with REITs now positively impacted.

The temporary shutdown of assets had been especially disruptive for SME retail tenants, according to Mr Berry, with many landlords providing assistance through rental waivers and deferrals in line with the National Code of Conduct.

“The ability for landlords to work constructively with tenants will likely see businesses and the asset itself best positioned for the recovery phase,” he said.

At the retail subsector level, consumer sentiment has returned strongly from very low levels and, with the opening up of the economy, there has been material improvements in foot traffic, in many cases not far below pre-COVID levels. While conditions are tough and there will be challenges, Mr Berry identifies value across the retail REIT sector.

In terms of the office subsector, tenant demand has continued to soften and this is expected to continue in a recessionary environment.

“However, offsetting this vacancy are at low levels in the Sydney and Melbourne CBDs. The introduction of social distancing measures may further assist in pushing against the continued densification of workspaces, such as hot-desking, which is positive.

“Corporates have been largely working from home for a number of months now and, while there’s always been a degree of cynicism regarding staff productivity, COVID-19 has demonstrated that the workforce can be highly productive when working from home. The benefits of an office will remain for collaboration, idea generation and face-to-face meetings, but there will undoubtedly be some changes moving forward,” he said. 

As a result, Mr Berry believes the opportunities across east coast capital cities will be in suburban markets, largely due to uncertainty around office commuting.

“Our preferred CBD office market is Perth, as it’s in the recovery phase with more attractive value metrics and has a far easier commute to the CBD than other Australian capitals.

“Overall, REITs are managing through a very challenging environment…they were at the front line of closing down the economy but are poised to lead in the recovery,” he said.

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