April 03, 2020

April 03, 2020 | Adviser News

Zurich Investments Australian Property Securities Fund - March 2020 snapshot

As of 31 March 2020; % 1 Month 3 Months 1 Year 5 Yrs (pa) 10 yrs (pa)
Zurich Investments Australian Property Securities Fund -36.50 -36.81 -33.71 -0.55 7.66
S&P/ASX 300 AREIT Accumulation Index -35.16 -34.31 -31.33 0.46 7.21
Excess Return -1.34 -2.50 -2.38 -1.01 +0.45
Source: Zurich Investments
  • Coronavirus related developments did not spare the AREITs asset class in March, which recorded its sharpest monthly fall since the GFC.
  • Containment measures to ‘flatten the curve’ will have a material impact on rental incomes in the near term, though the impact is expected to be temporary.
  • The market has been quick to significantly mark down sub-sectors deemed most at risk, though it is unlikely that any will be immune.
  • Investors need to look through the economic disruption in 2020 to identify areas of value for the longer term.

Sub-sectors performance:

  • Within AREITs, the Retail Mall landlords are the most obviously impacted by the containment measures given the sharp fall in foot traffic and headlines regarding store closures; rental income will be impacted, but Renaissance expects landlords to work with tenants, particularly those more exposed to discretionary spending (rental holidays are less costly than evictions). The sub-sector fell @ 50% in March, quickly discounting a very severe and extended impact.
  • The Office and Industrial sub-sectors fared relatively well (Dexus -25%, Goodman Gp -20%); however, it is unlikely that they are immune as the shock permeates the broader economy (occupiers of space become more cautious, demand for space falls, vacancies rise and rents fall).
  • Residential sub-sector was mixed with Stockland underperforming the index and Mirvac outperforming.
  • Long WALE stocks outperformed on average, despite higher premiums to NTAs.
  • In general, the stocks which fell the most were already the cheapest.

Valuation dispersion:

Source: Renaissance Property Securities Limited
  • This significant dispersion in sub-sector performance has been reflected in a widening in valuations between those sub-sectors deemed ‘safe’ and those deemed more at risk.
  • For example, the PE gap between Goodman (21x) and Scentre Gp (8x, which assumes earnings will fall by 30% in 2021 (relative to 2019)) has widened again to levels last seen in mid-2019.
  • (In 2H 2019, value outperformed momentum and the divergence in valuations stared to narrow).

What’s been discounted in the Mall REIT valuations?

Scentre Group/ Vicinity:

  • For CY20, Renaissance assume earnings go to zero. Zero earnings is equivalent to @ 65% fall in net operating income from assets (equates to 65% rebate on all rental income). Income was normal for January and February.
  • For CY21, Renaissance assume that the virus has passed and malls are fully open but that there will be elevated vacancy (@ 25% vacancy of the specialty tenants for the whole year). In terms of earnings, they are assuming a 30% hit vs CY19 earnings.
  • Renaissance then assume that the mall REITs would have an above average increase in EPS for the following 3 years as vacancies are leased.
  • These assumptions put Scentre and Vicinity on approximately 8x (2021 EPS, which includes that 30% fall in earnings). Also trading at a 60% discount to MT NAV.


  • Using the same logic as above, Unibail is trading on approximately 6x 2021 earnings.
  • The cheaper multiple reflects higher gearing. Unibail has Eur2.2bn of debt maturities over the next 12 months, but they have Eur10.2bn of cash in hand plus undrawn debt lines remaining, so they have ample liquidity to refinance maturing debt.
  • Unibail is trading at a 76% discount to NAV.

Fund positioning:

  • Renaissance maintains an overweight to Malls, as this is where relative value is most attractive.
  • This positioning has impacted performance in the short term (including March), but Renaissance notes that a key lesson from the GFC was that stocks that sold off the most also provided the richest opportunity.


  • AREITs must distribute all taxable income.
  • Distributions are likely to fall in the short term, but this valuation tool becomes relevant as conditions normalize.

Cap rates:

  • Hard to tell if cap rates will change much, particularly given the level of 10-yr bond yields.
  • Renaissance expects property values to come down, though due more to lower cash flows.


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 April 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 Zuric.
Past performance is not a reliable indicator of future performance. GINN XYY9MQ.00000.SP.03CSTT-015483-2020

For previous updates, click below:

❯  17 March 2020