The second quarter of 2020 will be chronicled in history books and remembered for years to come. The global COVID-19 pandemic and resulting lockdowns that began during the first quarter led to historic declines in economic activity during the second quarter. While the global economy is beginning to recover with the aid of massive monetary and fiscal stimulus, there remains much uncertainty about the path of the recovery.
In what can be considered a credit to central banks around the globe, financial markets remained largely functioning during the quarter. This is in sharp contrast to the Global Financial Crisis (GFC) of 2008-2009. Further, better balance sheets this cycle have allowed most REITs to weather the storm. During the GFC, we saw many REITs raise equity to recapitalize their stressed balance sheets, while during the COVID-19 crisis we have seen most equity raises as opportunistic moves to take advantage of potential acquisition opportunities created by potential market dislocations.
Public market overreaction creates opportunities for REIT investment managers to add value
Given the global nature of this pandemic, there has been little regional variation in performance or expectations. In fact, our analysis suggests that real estate valuations around the world will follow similar paths. Based on our analysis, we expect net asset value declines of approximately 7-9% across the universe of REITs. While some sectors, namely retail and hotels, are likely to see larger declines, there are multiple sectors poised to maintain or even increase their values. For example, the secular tailwind from growth in e-commerce is expected to accelerate the need for more logistics space. Similarly, medical office has shown strength, with a positive outlook, as the healthcare system is more important than ever.
However, despite the positive returns during the quarter, listed real estate returns have declined well in excess of our expected value declines of 7-9%. We have seen during past periods of extreme market volatility that public markets tend to overreact. This creates opportunities for REIT investment managers to add value.
FTSE EPRA/NAREIT DEVELOPED RETURNS IN USD AS OF 6/30/20
In light of recent events, our outlook has changed dramatically and is unclear. We know that the global economy is reopening, but the threat of COVID-19 has not passed. We know that the pandemic will eventually pass, but the timing of this is unclear. We are seeing the acceleration of some longer-term trends, namely the threat of e-commerce to retail and resulting benefit to logistics. Overall, though, once COVID-19 passes as a public health risk and economic activity resumes, we believe that the commercial real estate market will also see a resumption of demand supported by massive monetary and fiscal stimulus programs around the globe.
- Past performance is no guarantee of future results.
- The views and opinions in the preceding Commentary are as of the date of publication and are subject to change.
- There is no guarantee that any market forecast set forth in this presentation will be realized.
- This material should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment.
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- NASDAQ is a broad based capitalization index-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The Dow Jones Industrial Average is the measure of the performance of 30 “blue-chip” stocks, considered the leaders of the market. The S&P 500 Index is an unmanaged index generally considered to be representative of the large cap segment of the market. The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 11% of the Russell 3000 total market capitalization. The Dow Jones Utility is price-weighted average of 15 utility companies that are listed on NYSE and involved in production if electrical energy. The MSCI World Index is free-float weighted equity index which include developed world markets. The FTSE EPRA/NAREIT (Europe Public Real Estate Association/National Association of Real Estate Investment Trusts) Index is a total return performance index of all equity REITs tracked by FTSE EPRA/NAREIT. The Indices are presented for illustrative purposes only and are not intended to imply Heitman’s past or future performance. The performance of the Indices assumes dividend reinvestment, but do not reflect transaction costs, advisory fees, custodian fees, trading costs and other costs of investment. Individuals cannot directly invest in any of the Indices described above.