COVID-19: Implications for listed real estate
Having observed closely both the Chinese and United States response to the early stages of the novel coronavirus in each country, our view is that investors should be preparing themselves for further spread of the disease and the resulting impact on markets.
The US has not at this time implemented the kind of measures that are having some level of success in containing COVID-19 in China, and outside of Singapore it is questionable whether other countries have the capacity to do so even if they wished to follow China’s lead. Italy is trying, but it’s too early to conclude if it’s working, as the case count explodes and healthcare facilities become overwhelmed, the risks other countries experiencing the same issues increase.
The reaction of US markets has been volatile with a sharp downward trajectory. Until recently, we believe, the investment community was not grasping the extent of this event, but responded more to the movements around the Democratic nomination than to the potential economic fallout from the outbreak; but that all changed when quarantining and travel restrictions were implemented.
In the event of a sharp spike in cases over the next few weeks in those countries where the virus has gained a foothold, policymakers will be forced to respond much more emphatically than they have to date. A further deterioration in market and credit conditions could well follow, as restrictions on the movement of people and goods constrain both demand and supply in the economy
A listed real estate response
Regardless of the prospect of further policy response from central banks and fiscal measures from governments, we believe that the situation calls for movement to more defensive positioning. The GLRE team commenced this process some weeks ago and will continue to realign as necessary as the situation unfolds.
This is more than an economic event - it is a health crisis. Questions as to when it is resolved and its impacts in the meantime will hinge upon events that are to a large extent beyond the control of economic policymakers.
In the interim, economic growth is likely to remain very challenged, and as a result, returns from many investments that are predicated on near term economic growth and or the gathering of people will disappoint. The troubles in certain parts of the retail and lodging sectors are well-documented as a consequence of this downside risk. Instead, AMP Capital believes investors looking for more defensive positioning should be looking to bullet-proof balance sheets with consistent long term cash flows which are either not exposed to the short term volatility of the current economic climate or which may even be the beneficiaries of increased demand given their business models.
Positions of strength
The first category – those areas where demand is likely to be unresponsive to the outbreak, are concentrated around basic needs, and most notably shelter and therefore residential property. In general, the low interest rate environment should hold up values and consumer demand issues are unlikely to flow over to rental income in the short to medium-term as the population needs a home and will be asked to spend more time there than normal in coming months.
An area of particular interest is US manufactured housing, which had resilient and consistent growth in net operating income throughout the 2008 financial crisis and the collapse of the dot-com bubble.
Telecommunication towers and data centres assets are another area where demand, may likely grow in this environment. In today’s society, data is very much an essential need, and will become even more so should developed economies move significantly to quarantine the population and increase the need of people to work-from-home. As a case in point, data consumption and e-commerce demand has ballooned in China since containment measures were introduced.
One sector which we believe is fairly certain to experience growth over the coming months is the healthcare sector. Two asset classes to watch in this regard are medical office buildings and life science labs. As hospitals become increasingly occupied by confirmed coronavirus cases, patients seeking testing or presenting for other conditions are likely to prefer treatment offsite, and medical offices will effectively become mini-outpatients departments. The need for suitable space to match this demand has the potential to drive revenue growth.
The fuel for growth in life science labs will be a surge of investment in research and prevention measures from the corporate sector, philanthropists, NGOs and especially from governments - a number of which have already announced substantial funding for these purposes. These bespoke office buildings are unique as they also house laboratory components, allowing biotech and life science companies to house the full suite of their research capabilities in the one location. We believe the GLRE team is already positioned well in this area, such that when a vaccine is released, there is a strong possibility that an asset in our portfolio will have contributed to its development.
Subscribe below to Market Watch to receive my latest articlesJames Maydew, Head of Global Listed Real Estate
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