Commercial property: retail landlords are missing the madding crowd

The outlook for shopping centres and offices is murky, but anxious investors seem to be expecting the worst

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.

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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