March 17, 2020
March 17, 2020 | Adviser News
Zurich Investments Australian Property Securities Fund Coronavirus update
Governments have responded to the acceleration in new cases of coronavirus with travel bans and containment measures to ‘flatten the curve’ on the infection rate. Significant monetary and fiscal policy stimulus has also been deployed to help offset the impending economic correction in spending, investment and employment. However markets, in the short term, remain deeply unimpressed. There has been a significant increase in volatility and a flight to perceived safety – not dissimilar to the market reaction during the GFC.
What has that meant for AREITs*? Which sub-sector is considered “safe” and which is not? Perhaps it’s not a surprise, in this environment where markets trade on sentiment rather than valuation, that the relatively favoured sub-sectors include Office, Industrial and supermarket landlords. On the other hand, discretionary retail is thought to be most at risk. But investors need to be mindful of what has already been discounted by the markets.
The office sub-sector, for example, is not immune to falling business sentiment and some corporates may need to adjust their workforce. This scenario is not being fully factored into the valuations and expectations may need to be revised lower.
Industrial is primarily driven by e-commerce, but expensive valuations do not take into account the significant bottlenecks that have become apparent in the last few days and the e-commerce experience risks being quite poor.
Discretionary retail is clearly at risk, though this has been aggressively discounted in share prices already. It would appear that most at risk in the coming weeks, from a cash flow perspective, will be the ‘Mum & Dad’ retailers, though mall exposure to them is just 5% of their tenant portfolio.
What is “safe” was already expensive, while malls were already cheap. And while it’s impossible to know exactly what the next few months will hold, the coronavirus will pass. And the key lesson from the GFC was that the stocks that sold off the most also provided the richest opportunity. Exposure to malls may impact fund performance in the short term, but these are the cheapest stocks and they may re-rate the most when the infection ‘curve’ flattens and markets recover.
*Australian Real Estate Investment Trust
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