REITs are a mixed bag regarding how they perform during economic recessions. Mainly, REITs focused on short-term leases are among the worst victims. COVID-19 has proven that there's a lot of truth behind this "rule of thumb."
However, have all REITs in Canada gone through the same hardships? We've commented extensively on how real estate has come with a handful of unexpected statistics. Some markets plummeted, whereas others flourished amid the crisis.
Now, the vaccine has started its first rounds throughout the globe. Several industries promise recovery, but is that true for REITs? The answer is a bit more complicated than “yes” or “no.”
The first stop of the road: Impact
Naturally, the first step in the road is to resist the initial impact. Yahoo! Finance offers excellent insight into the worst-hit REITs in Canada. They also highlight how travel restrictions signified a considerable handicap for some firms.
Luckily, curbing this damage has been possible with exemplary leadership and technology implementation. We’ve personally helped and witnessed how modern solutions have helped several clients overcome the initial struggle.
Let’s analyze the three examples from the article to see what we’ve been through.
American Hotel Income Properties
AHIP is an apparent victim of the pandemic, entirely focused on hotels. Additionally, they were undergoing a rebranding and renovation project that halted its cash flow. The pandemic was the last straw, resulting in job losses and ceasing operations.
In April, the trust had to suspend its monthly distribution, and management needed to defer March distributions. As a result, directors and executives took advantage of the situation and bought hundreds of thousands of assets.
Cominar
This diversified trust suffered the most damage from its mall assets. The order to close non-essential spaces was disastrous for a company with nearly 80% of its portfolio consisting of non-essential services.
It marks the second REIT primarily dedicated to non-essential services. Therefore, it's easy to see why portfolio diversity is decisive regarding a company's quick recovery chances. It's a worthy consideration even for those less affected.
RioCan
Finally, RioCan focuses on mixed-used and retail-focused properties. It's not difficult to spot the problem with that sentence. Again, it's proof of how REITs focused on retail, office, and other non-essential sectors faced the most significant struggle during the pandemic.
It's also worth noting that the main advantages noted in the article related to portfolio diversification. While it might be "too late" to implement said strategy, it can be a necessary adaptation for embracing recovery.
The second stop of the road: Surviving
After overcoming the first hit, the next step is to implement damage control measures to reduce the damage. The first stop tests a company’s preparedness. The second stage focuses on emergency measures.
The best way to assess the “survival” episode of the pandemic is this article from MSN money. The main question is whether REITs can overcome the current downturn. This point of view should shed light on how companies can face the upcoming recovery period effectively.
With the sudden surge of COVID-19 spikes, we can say we’re still exiting this stage.
Most vulnerable REITs
Naturally, the most vulnerable REITs are those focused on sectors affected by lockdown measures. That includes the ones we’ve mentioned already, but also gyms, cinemas, and office spaces.
Additionally, the article mentioned that office space hasn't been as affected as retail spaces. That doesn't mean it's free from scratches. Office demand has been plummeting, and, likely, it won't recover entirely due to the popularity of remote work.
Could the future look optimistic?
Not everything is grim, even for those sectors. The vaccine is excellent news for everyone, but even that's not everything. For instance, bond yields remain at a decade-long low. Cheap debt can help property values to increase with more robust demand.
Additionally, most of the worst-affected REITs entered the pandemic in stable conditions. Therefore, the pandemic's hit could've been much worse. Projects like redeveloping unused space into residential assets can prove a vital advantage during recovery.
Vaccination efficiency
The upcoming vaccine is still a significant development for all industries. The efficiency of the initial and following rollouts will determine how quickly recovery makes its way to REITs. Proper vaccination is crucial for reactivating several sectors.
Hospitality, office space, and similar markets depend on crowding to an extent. Social distancing and lockdowns were the biggest hit to these markets. As these measures become less necessary, the rebound could be significant.
The third stop of the road: Immediate recovery
Now, we can say we're finally in 2021, but we're not ready for recovery. COVID-19 infection spikes hit the world during this first quarter. That means we're not in the recovery period, but we're close to it.
The immediate recovery "stop" refers to the initial re-balance in demand. Vaccination means people will slowly go back to their offices and "normal" lives. That's a slow period, and that's what we mean by "immediate" recovery.
The Smart Investor provides an excellent analysis about REITs and their chances for recovery this year. It’s worth noting that the article focuses on the Singapore market, but we can still learn great insight from the article.
Hospitality
As we mentioned, the hospitality sector will remain slumbering as long as borders remain restricted. For instance, the article mentions Asia Pacific’s largest REIT, which lost 28% of its year-on-year revenue.
Sustained recovery is unlikely to come as long as borders are closed. Repurposing spaces for healthcare and similar flourishing industries is a considerable advantage for companies suffering similar losses.
Retail
Retail REITs have experienced excellent recovery rates with Singapore’s reopening phases. Some trusts even enjoyed over 60% recovery. While footfall will remain low thanks to social distancing, telecommuting can make up by increasing spending considerably.
Again, this report proves the importance of adequate vaccination. Allowing people to return to their favorite malls and stores is critical for ensuring recovery for REITs in Canada. Malls with open space amenities also enjoy a considerable advantage.
Commercial real estate overall
The article also mentions a hybrid approach for commercial real estate. The need for office space has been through significant reconsideration. We've already mentioned repeatedly how remote work can become the standard for many workers.
That’s where hybrid models come in: combining office presence and remote work. Not all employees enjoy working from home full-time. Some will come back to their office entirely, and others will prefer to divide their time between telecommuting and their company’s offices.
Industrial
Finally, industrial REITs have been the most vital sector during the pandemic. According to the article, the main advantage comes from their tenant and portfolio diversification. Most of these tenants can withstand the crisis's damages.
Curiously, that’s also true for industrial REITs in Canada during the start of the pandemic. It also seems to be the same for REITs with properties around the world.
The last stop: Long-term implications
Finally, long-term recovery won’t come this year. Several experts agree that the world won’t go back to pre-pandemic times. That doesn’t have to be a negative outlook. Most industries will probably recover almost completely, and that will benefit most REITs.
For instance, the office and hospitality sectors are some of the biggest victims. They’re also expected to go through the slowest recoveries. However, not everyone enjoys working from home, and a majority of people will likely return to offices—at least partially. Travel demand has been low solely because of travel restrictions.
Once various industries start to gain their strength back, REITs will follow suit.
An optimistic outlook
Even before 2020 ended, some experts were already advising which REITs to buy for this year's recovery. The Motley Fool is a great example. In its article, it mentions two REITs to keep in mind for investment.
Regardless of opinion, it's promising to see investors' interest in REITs and their chances of recovery. We can also learn what's attractive about these companies, which helps us understand what to do for a full recovery.
SmartCentres
This REIT endured significant damage, mainly because of its retail-centered portfolio. However, SmartCentres benefits from excellent retail tenants, with retailers who already demonstrated their resilience during the pandemic.
That's why we always say that the tenants' quality decides the future for REITs. For optimal recovery, companies must reevaluate their current tenants and which ones are showing good numbers. Shifting focus can be a lifesaver.
Inovalis
Inovalis is somewhat similar to SmartCentres, but instead of retails, it focuses on office space. Again, many workers will prefer to stay home after the pandemic if possible. But that doesn’t mean office space will disappear.
Remote work doesn’t always mean working from home. Coworking space is a vast market to look out for as social distancing subsides. Repurposing office spaces accordingly is a worthy consideration.
Should we wait for things to go back to normal?
After reading all the data, the answer should be obvious. Things will go back to normal, at least as much as possible. However, recovery won't come from waiting but from adapting and seizing opportunities.
That means that the road to recovery begins with making good choices before the pandemic, but that’s not the end. Make sure to stay on top of market developments, assess your assets and learn how to adapt when you need.