In the below article La Francaise Forum Securities provides a perspective on what happened during Q1 2020 in global real estate securities asset class, where are current valuations, opportunities and how this crisis may represent a new buying opportunity.
During the past month or two, most of us have entered a once in a life-time paradigm, where we are witnessing an unprecedented time in the world economy and in our lives. While our ancestors may have lived through many periods of such disruptions, for our generation this is a new experience and an unchartered territory. Every sector of the global economy is to a larger or lesser extent impacted by the spread of coronavirus. Every single government is tackling the crisis, whether they reacted early or with a delay. Every single individual had to somehow alter the daily life as a result. Most importantly, it is a crisis that has not only healthcare, political, economic / financial and social impacts, it is a crisis where every loss of life is a sad and painful outcome for mankind.
Unlike in the previous 2008 crisis, we have not seen a lot of global co-ordination, pointing to the fact that the world is now more focused on the protection of national interests. Lot has been written about the impact on wealth, on unemployment, growth retracement, fiscal burdens, monetary lending, mental health issues and potential social outbursts. The real damage will depend on how long the crisis lasts, which is still beyond anyone’s ability to predict at this stage despite of all efforts.
The sharp decline in prices for real estate securities has responded to this uncertainty, which in turn has offered a new opportunity to accumulate companies at large discounts. As is always the case, the public market responded fast to this healthcare and economic crisis, repricing real estate securities globally very efficiently and quickly. In the private real estate sector liquidity dried out quickly, many private funds had to stop redemptions as their liquidity was not sufficient to service these outflows; the direct real estate market has yet to enter into a period of valuation adjustments, lasting potentially a few quarters. The public sector was trading at a 27% discount to last published asset values as of end of March 2020 and in other words is under-priced by the same magnitude to the direct real estate market on average globally. Needless to say, these discounts are backwards looking not forward looking, hence, may not be representative of the “real opportunity” in the sector and hence there is some degree of overstatement, but an investment opportunity, nonetheless.
It is indisputable that all real estate sectors are somewhat temporarily impacted, while in certain sectors we will see a more structural shift in valuations, such as lodging, mortgage REITs and retail, and others may be less structurally impacted – and rather witness just a cyclical move. It is still too early to know what the exact repercussions will be, but it is clear that no single company is pandemic proof: companies will come short in their rent collection process as a result of lockdowns, bad debts will rise, some businesses will not survive, leading to tenant losses / income losses for landlords, dividends are already being cut, some companies will suffer liquidity issues, some companies will turn into interesting consolidation / privatization opportunities, while other listed REITs may see management change. However, at a certain - hopefully not too distant - point these risks will turn out to be efficiently priced in; the focus should be on resilient companies, which seem to start to offer interesting entry points for savvy investors. The key in this bottom fishing process will be focus on quality of assets, quality of managements and underpriced, resilient business models. When this temporary event goes away, these companies will still be needed. This disruption is not going to make the sector obsolete. In summary, there are opportunities in the midst of the chaos. Let us explore them....
By Jana Sehnalova, CEO of La Francaise Forum Securities