Vaccine rollout the path to recovery
“In the wake of the coronavirus pandemic, vaccine distribution is paving the way for real estate to recover from historic lows, creating potentially attractive entry points in 2021,” says Senior Vice President, Head of Asia Pacific Real Estate, William Leung of Cohen & Steers Capital Management.
The firm is winner of best performing Global REITs fund (3 years), in this year’s Asia Asset Management Best of the Best Awards. The company was also recognised as Best Real Assets House in APAC.
The C&S Global Real Estate Securities Composite has achieved an annualized net of fee return of 10.2% since inception on April 30, 2003, outperforming its benchmark by 2.1%. Despite returns of -2.5% net of fees in 2020, which still outperformed its benchmark by 6.5%, Leung believes that the vaccine rollout and an economic recovery could deliver a meaningful benefit to areas that were disproportionately affected by the pandemic, such as hotels, retail, offices and senior housing. He adds that low interest rates and increasing fiscal spending globally could help to accelerate this process.
And while the rollout of vaccines may not be perfectly smooth, Leung is confident there will be meaningful progress toward widespread immunisation, clearing the path for a recovery in the economy and in real estate fundamentals.
“REITs have historically delivered their strongest returns – both in absolute terms and relative to broader equities – in the early stages of economic recoveries, as GDP accelerates but interest rates remain relatively low. We believe REITs’ historically attractive and growing dividends are likely to appeal to certain investors in today’s early-cycle environment and that economic reopening could begin in some countries by late spring, potentially benefitting property types most impaired by social distancing.”
The house view is that compared to other asset classes such as stocks, bonds and private real estate, underperformance has resulted in compelling relative valuations at the early stage of a what is expected to represent a new business cycle, historically a strong period for REITs. Indeed, after underperforming equities by 25% in 2020, global REITs ended the year at a -10X earnings multiple discount to global equities, a level not seen since the global financial crisis.1
“At a time when negative real yield have played a role in driving valuations for growth stocks to historical highs, we believe REITs represent an attractive opportunity to diversify portfolios with undervalued, low-correlated assets,” explains Leung. “Dividend growth has mostly resumed, and after factoring in dividend cuts in 2020, global REITs offer an attractive income in a low-yield environment, and twice the dividend income of equities.”2
Leung also believes that now is the time to capture high-risk premiums in listed real estate.
“While we believe both listed and private real estate currently offer better return prospects than broad equities, most listed REITs have already priced in reduced asset values, whereas private markets have yet to see a meaningful adjustment on average.”
REITs are also trading at wide yield spreads relative to 10-year government bonds in most major economies. Their current wide yield spreads to bonds may also provide a cushion against a rising-rate environment due to the potential for spreads to narrow. They also provide a defence against potential inflation, caused by massive government spending, compared with a negative incremental impact that this may have on stocks and bonds.
With vaccines and economic recovery one of the key themes being identified as influencing real estate demand in 2021, Leung believes that cyclical and secular trends are likely to create distinct opportunities at various stages of the recovery. Some of the real estate sectors most impacted by the pandemic, he says, may see the greatest benefit as businesses reopen. To varying degrees these include six major sectors, namely healthcare, hotel and gaming, retail, office space, self-storage and single-family rental, and technology-related real estate.
Few can deny that technology has had a big part to play in the changing habits of populations around the world.
“Many of the hardships of 2020 would likely have been more difficult without the technological advancements that have allowed us to work, learn, shop and interact from the safety of our homes,” says Leung, who believes that sustained investments in data networks and distribution capacity are likely to provide a long-term baseline of demand for the communications and logistics infrastructure assets owned by specialised REITs.”
He concludes: “Industrial warehouses, data centers and cell towers were among the top performing sectors in 2020 and a stronger economy could further add to their favorable fundamentals.”
1 At 12/31/2020. Source: UBS, Cohen & Steers.
2 At 12/31/2020. Source: Bloomberg.