We should have all expected the year 2020 to not go quietly into the past, as several events made headlines to end the year.
The most significant event was the US presidential election, which saw former vice president Joe Biden defeat the incumbent, Donald Trump, despite the Trump campaign refusing to concede defeat. The outcome of the election had little effect on the market though, as most had anticipated a Biden victory. Shortly after the election, we received the long-awaited news of the first COVID-19 vaccine trial results. The results from the vaccine developed by Pfizer Inc. and BioNTech SE and the vaccine developed by Moderna, Inc. both exceeded expectations and were promptly approved for widespread use. This news provided a strong positive lift to risk assets during the quarter.
That said, we also saw another spike in COVID-19 cases, so we are not out of the woods yet. The increase in cases meant many areas re-instituted varying levels of lockdowns and restrictions that will temporarily impact economic growth. However, continued aggressive actions by central banks around the globe have helped the capital markets function properly in a way not normally seen during a recession. Property stocks remain well off their highs, but companies have shown an ability to tap the equity and debt markets for capital.
Based on guidance from central banks, we expect the global rates to remain low, potentially for years to come. This should be supportive for real estate in general as demand grows.
FTSE EPRA/NAREIT DEVELOPED RETURNS IN USD AS OF 12/31/20
In Australia, Victoria’s longer-than-expected lockdown has led to weaker retail operating fundamentals and increased vacancies. However, with COVID-19 case growth slowing later in the quarter and fiscal stimulus measures in place, we now expect to see a rebound in retail sales. In the residential segment, state and federal stimulus is driving a strong residential market, particularly targeted at the first-time homebuyer demographic. Capital values remain steady for the office sector despite weakening fundamentals (with rising vacancy and sublease space). It appears buyers at current values view the current situation as a temporary issue.
Even as we saw a renewed rise in COVID-19 cases during the quarter, residential developers have been able to launch new projects. As we’ve seen elsewhere, retail sales and office demand are improving but remain below pre-pandemic levels.
Singapore is benefiting from declining COVID-19 cases and moving to a “Phase 3 Reopening” towards the end of the quarter. This allows for a greater density of people and stands to benefit the retail landlords.
As COVID-19 cases began to rise again across most of the region, we saw further lockdowns implemented to contain the pandemic. However, this continues to be met with additional monetary and fiscal stimulus from central banks and governments. This has supported both the capital and property markets, with various property transactions, mergers and acquisitions (M&A) activity, and capital raising happening during the quarter.
Further, we may have also reached an end to Brexit at the end of the quarter … maybe. A breakthrough trade deal was reached between the two sides, but there are still many details to finalize, including financial services to be discussed in early 2021.
In an expected outcome, albeit with coincidental timing, two regional mall REITs announced bankruptcies over the same weekend during the quarter. Pennsylvania Real Estate Investment Trust filed a pre-packaged bankruptcy and is expected to retain some equity value. At the same time, the outlook for CBL & Associates LP is less certain as it works through the process.
Third quarter earnings season for the REITs showed continued improvement in fundamentals as economic activity improved during the summer. This recovery likely stalled, though, during the quarter as case counts increased. Overall, most REITs have adjusted as best as possible to the environment, but there continue to be areas of stress, like hotels, which are still experiencing cash burns. The hardest hit sectors had the largest share price increases on the news of the vaccines during the quarter, though.
While we know the global economy is reopening, the threat of COVID-19 has not yet passed. The pandemic will eventually pass, but the timing is unclear. However, we can see some longer term trends accelerate, namely the threat of ecommerce to retail and the resulting benefit to logistics. Overall, though, once COVID-19 passes as a public health risk and economic activity resumes, the commercial real estate market will also see a resumption of demand supported by massive monetary and fiscal stimulus programs around the globe
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