Commercial property: retail landlords are missing the madding crowd

One day the shoppers will return © Getty

(Image credit: © TOLGA AKMEN/AFP via Getty Images)

published 13 July 2020

On the face of it, real estate investment trusts (Reits) and other stocks that hold property are lagging badly in this rally. The global iShares Developed Markets Property Yield ETF (LN: IWDP) is down more than 20% this year, even after rallying 30% from its March lows.

Yet that figure doesn’t tell the whole story. Many industrial Reits – especially those that specialise in warehouses, such as Segro, Britain’s largest Reit – are near all-time highs. So are data-centre Reits such as Digital Realty Trust in the US, or housing Reits such as Germany’s Vonovia. It’s the Reits that specialise in offices, retail or hospitality that have been hard-hit, as epitomised by Land Securities; it’s down almost 45% this year and is up just 8% from its lows.

The narrative here is obvious: people are staying at home, having all their shopping delivered and working online. The Reit sector is signalling that these trends will continue. The key question is whether this vision of the future is correct.

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Retailers are not paying up

There’s no doubt that profits and payouts will be dire this year. Land Securities collected just 29% of retail rents within five working days of the due date in June, compared with 92% in the same month last year. Offices are a bit less grim; Land Securities collected 81% of June rents on time, compared with 95% last year. The pattern is similar for other diversified UK reits, such as British Land, and in other countries.

The retail crisis is an acute one, but let’s make the case for why the sector could bounce back. People go shopping to be entertained – in eating places, bars and cinemas as much as in shops. Online shopping can’t replace that. Yes, some retail chains will collapse; third-rate properties will struggle; over-indebted owners – eg, Intu Properties in the UK, which collapsed into administration last month – may not survive. But shoppers will return and shopping centres will reinvent themselves.

The threat to offices is more chronic: ongoing home working will slash the need for offices (Fujitsu said this week that it will halve its office space in Japan). Still, right now people are mostly noticing the benefits of home working; the disadvantages will become clearer in future. So the shift may well be smaller than feared (and pressure to give workers more space to curb the spread of Covid-19 may help offset it).

The uncertainty is very high. Still, it is striking how much investors are shunning assets that they used to love. There are no dedicated office or retail Reit ETFs, but even a broad Reit ETF such as IWDP looks like a promising way to play either a V-shaped recovery, or a return to semi-normality within a couple of years.

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Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.