How did Covid-19 Impact Commercial Property as an Asset Class?
As we discussed in our previous post, the residential property sector has proven remarkably resilient in the face of the Covid-19 pandemic and associated economic fallout, probably largely as a result of historically low interest rates. However, to a large degree, attempts to understand the impact of the virus on the Commercial Property Sector Asset Class from an investor perspective, has been difficult to unpack for investors, given the silence of the REITs companies.
Many investors in REITs property trusts have sat open-mouthed as they have watched their relatively secure and stable property investments experience a bloodbath in terms of fund values as well as the almost complete disappearance of income. Note that income normally has an inverse relationship to fund values i.e.: when the capital value goes down, yields go up. An unprecedented double-whammy. Many REITs companies could not pay dividends and in fact, going forward, are seeking an amendment to legislation to avoid paying out all profits when protection is needed.
Now we all know this relates to the fallout from the pandemic, but what exactly happened? Recently Estienne De Klerk, CEO of Growthpoint who also happens to be the chairman of the SA REITs Association, was Interview by Bruce Whitfield in a hosted Webinar sponsored by PSG, and he unpacked the scenario for investors.
It goes something like this:
Particularly in the retail sector, shop owners were told to close for lockdown and decided to withhold payment of rentals to the landlords. Landlords, therefore, stopped receiving income.
The South African commercial property sector had the benefit of assessing the fallout of the pandemic in the northern hemisphere some weeks before it reached our shores. Unlike many of their overseas counterparts, landlords, financiers and tenants swiftly sat down and agreed in principle to share the pain. Nonetheless, this goes without saying, there was fairly large pain to be shared.
The fallout was immediate, REITs fund values reduced by up to 50%. The frustration for investors is that they would look at their unit trust values with horror and no matter how much they googled, the funds maintained a stoic silence – perhaps assuming that investors would instinctively know that the sector was experiencing a fallout from the pandemic and lockdown..
So, is there hope for commercial property investors? Estienne De Klerk discusses this from a fund management point of view and that is worth listening to. The full interview can be viewed on PSG think big series website:
At Commercial Exchange, we make a habit of looking for opportunities where others see obstacles. One of the areas we see investment opportunity is once again in the residential development market and smart city models, which offer the kind of lifestyle and convenience lacking in the traditional model of office nodes, commuting from the suburbs and urban sprawl. The sectors that will benefit are those that stand to enjoy the windfall from government infrastructure investment in the future, along with demand for housing in the affordable and entry-level markets. We will discuss these opportunities in more detail in our next conversation.