Dan Cave
2020 is proving to be a challenging year for investors with most asset classes adversely impacted by the COVID-19 global pandemic.
In its latest sector report on Property, Zenith Investment Partners found that property investors have not been immune to market volatility. For the 12 months to 31 May 2020, the Australian and Global Real Estate Investment Trusts (A-REITs and G-REITs) indices delivered -16.40% and -18.66%, underperforming their broader Australian and Global equities counterparts by 9.88% and 23.52%. (The S&P/ASX 300 Index returned -6.52% while the MSCI World ex Aust $A Hedged Index returned 4.86%.)
According to Dan Cave, Senior Investment Analyst at Zenith, given the current climate, these returns are not surprising.
“Property’s performance is fundamentally underpinned by activity and interaction between people,” said Cave. “The COVID-19-led social distancing policies enacted around the world have had a profound impact on the usage of property across many property types.
“Amongst Zenith’s rated Australian property managers, performance relative to the benchmark was mixed with the median manager returning -14.37%, marginally outperforming the benchmark on a net return basis,” said Cave. “While returns from our global rated property managers were negative on an absolute basis, relative performance was much stronger, with all but one manager outperforming the benchmark.”
Despite disappointing returns through the crisis, Cave still believes there is a place for A-REITS and G-REITS in investor portfolios as they still have several attractive attributes.
“REITS offer diversification benefits for multi-asset portfolios due to the asset classes’ underlying characteristics. There are also yield advantages owing to the rental income focus, and the opportunity for further sub-sector diversification across the emerging alternative sectors which provides lower levels of cyclicality compared to traditional property types.”
Traditional core sub-sectors – office, retail and industrial tend to be pro-cyclical and as such returns carry a moderate-to-strong correlation to each other. Alternative sectors such as self-storage, data centres and manufactured housing, with their different drivers, can offer lower cyclicality, reducing REIT portfolio volatility and enhancing risk-adjusted returns.
“This is more evident in the global context,” said Cave. “Technology-related segments of the G-REIT market have proven to be most resilient. Data Centres REITs delivered approximately 18% for the year to 31 May, while industrial REITs driven by e-commerce and logistics, returned -1.71% over the same period. Hotels and resort, shopping centres and hospitality-focused sectors fared the worst returning -49%, -41% and -29% respectively.
“The outbreak of COVID-19 has quickly translated into a severe shock for the global economy and real estate markets, and the situation continues to be fast-moving. Zenith will continue to observe the sector closely, with a focus on how fund managers, landlords and tenants respond to current challenges and how this likely impacts or rewards investors.”