Defined Benefit
Insurance Assets
Nonprofit

Pandemic Hit All Sectors; REITs Gained but Trailed Equities

Pandemic Hit All Sectors; REITs Gained but Trailed Equities
clock
2 min 37 sec

All sectors saw negative appreciation

  • Pandemic’s impact reflected in 3Q20 results
  • Income remained positive except in Hotel sector.
  • All sectors experienced negative appreciation; Industrial remained the best performer.
  • Dispersion of returns by manager within the ODCE Index due to both composition of underlying portfolios and valuation methodologies/approach
  • Negative appreciation returns expected for 4Q and beyond

U.S. real estate fundamentals

  • Vacancy rates for all property types are increasing or will likely increase. 
  • Net operating income has declined as retail continues to suffer.
  • 3Q rent collections showed relatively stable income throughout the quarter in the Industrial, Apartment, and Office sectors. The Retail sector remained challenged, with regional malls impacted most heavily.
  • Class A/B urban apartments’ rent collections have been relatively strong but vacancies have increased.
  • Construction projects are increasing depending on municipality openings; existing projects have continued as material has become available.
  • Transaction volume dropped off during the quarter with the exception of industrial assets with strong-credit tenants trading at pre-COVID-19 levels.
  • Cap rates remained steady during the quarter. The spread between cap rates and 10-year Treasuries is relatively high, leading some market participants to speculate that cap rates will not adjust much. Price discovery is happening and there are limited transactions.
3Q20 Real Estate Sector Quarterly Returns

Global REITs rose but lagged the equity market recovery

  • Global REITs underperformed in 3Q20, gaining 2.1% compared to 7.9% for global equities (MSCI World).
  • U.S. REITs rose 1.4% in 3Q20, lagging the S&P 500 Index, which jumped 8.9%. 
  • Globally, REITs except in the U.S. and Singapore are trading at a discount to net asset value. In some regions the discount is at a five-year high.
  • Property sectors are mixed, between trading at a discount or premium.

Real estate investment opportunities

  • Primary opportunity: purchase of mispriced publicly traded real estate, both equity and debt
  • Emerging opportunity: purchase of mezzanine loans from forced sellers
  • Industrial development can be implemented by well-capitalized owners that do not need a construction loan.
  • Low LTV loans on core properties
  • Distress, take-privates, rescue capital, recapitalizations, value add re-leasing strategies, and lending strategies will move into the opportunity set for investment as the pandemic and social distancing continue and operating income is squeezed by tenants not paying rent.
  • If core open end real estate funds are on the sidelines due to redemption queues, there may be more opportunities to buy core assets with less competition or to buy assets from the funds themselves.
  • Industrial has been the one bright spot, as e-commerce take up has accelerated.

Infrastructure opportunities

  • Strong performance from communications assets has drawn interest from infrastructure investors across the sector, and in some cases from real estate investors for data centers.
  • Pandemic could accelerate the purchase of assets or formation of PPPs from cash-strapped governments/municipalities.
  • Potential purchase of mispriced publicly traded infrastructure
  • Some sellers looking to secure strong pricing for stable assets with steady cash flows 
  • Opportunity for purchase of assets from over-leveraged buyers and/or with GDP-linked revenue

Timberland and farmland opportunities

  • Investment in farmland may increase if it proves to be a true diversifier in the pandemic.
  • Volatility in commodity prices and changing supply chains may provide buying opportunities from overleveraged farmers and those who cannot shift crops away from restaurant/institutional use to grocery stores and suppliers to individual consumers.
  • Institutional investment in timber has been waning for several years. The pandemic is unlikely to turn that tide.

Posted by

Share
Share on facebook
Share on twitter
Share on linkedin
Related Posts
Defined Benefit

2021—Starting Off with Gusto!

Kristin Bradbury
How the economy did in 1Q21, and the outlook ahead.
Defined Benefit

What We Found in Our Latest COVID-19 Survey of Investment Managers

Amy Jones
The 3rd edition of our Coping with COVID-19 survey of investment managers focuses on plans for office reopenings and vaccination policies.
Defined Benefit

The Gray Areas in Green Bonds

Kristin Bradbury
A common challenge for those investing in green bonds is that there is no uniform set of requirements or standards. This makes analysis and monitoring...
Defined Benefit

The Story Behind Callan’s 2021 Capital Markets Assumptions

Capital Markets Research
An explanation of Callan's 2021-2030 Capital Markets Assumptions, how they were developed, and what changed from last year's projections.
Defined Benefit

GameStopped—Or Just Getting Started?

Jim McKee
A key issue highlighted by GameStop is the unintended consequences of zero-cost money and commission-free trading enabled by today’s highly stimulat...
Defined Benefit

Relief Bill Provides a Shot in the Arm to Corporate Pensions

William Emmett
The $1.9 trillion economic relief bill included another round of pension funding relief that reduces required, tax-deductible contributions for single...
Defined Benefit

Bloomberg Barclays Pricing Time Change and What It Means for Institutional Investors

Kyle Fekete
Asset owners, investment managers, and other parties may experience discrepancies in reporting point-in-time pricing or performance as a result.
Defined Benefit

Why the Yield Curve Is Really Curving

Dario Buechi
As prospects for growth have brightened, yields on longer maturity bonds have risen while short-term rates have been anchored by the Fed.
Defined Benefit

What Investors Need to Know About the Potential Eviction Crisis

Aaron Quach
Institutional investors should continue to closely monitor rent collections within their multifamily portfolios, as decreases in collections may indic...
Defined Benefit

Private Equity Goes on a Roller-Coaster Ride

Gary Robertson
A rough averaging across fundraising and private investment and exit volumes indicates a drop of only 20% for private equity activity in 2020 from 201...