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

 

Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated March 2020, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such.  Past performance is not a reliable indicator of future performance and should be used as a general guide only. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich. Past performance is not a reliable indicator of future performance. GINN XYY9MQ.00000.SP.03. CSTT-015403-2020