When valuing a residential housing investment the catchcry is often “location, location, location.” But when thinking about commercial property the industry sector can be as critical as the location.
That is because the Covid-19 disruptions are impacting different sectors of the economy in different and uneven ways.
In terms of commercial property, office buildings in central business districts will be negatively hit by the working from home trend, while pure retail is hurting from consumer caution and forced store closures.
Then there is the geographical effect, as property companies with a large portion of their assets in Victoria brace for a second wave of the pandemic and another lockdown.
Meanwhile, other areas of commercial property are actually benefitting from the economic impact of the disruptions.
The boom in online retailing means that companies investing in warehousing and logistics are on the right side of the pandemic.
Add to that sectors which were on the rise well before Covid-19, such as storage, aged care and health care.
A well established way for Australian investors to access commercial property has been through real estate investment trusts, the so-called REITS, and there are many to choose from.
Then there are also listed Exchange Traded Funds (ETFs), which mirror the returns from property without actually holding any bricks and mortar.
REIT companies are listed on the ASX and purchase physical property which they maintain and collect rent from tenants, with distributions or dividends paid to investors who are unit holders.
Because income is driven by rent, these companies are attractive for their dividend payments but also offer capital upside as property values increase.
In the current market, there is a lot of uncertainty around office based REITs, and the Reserve Bank of Australia recently issued a warning that the sector was vulnerable to falling rents, rental defaults, and declining values.
In the shopping centre sector, broker Morgan Stanley recently warned that Vicinity Centres was the REIT with most of its exposure to the fragile Victorian economy, as 46 per cent of its income came from assets in Melbourne.
Vicinity has paid a respectable dividend yield of 6.11 percent, but its shares have been on a roller coaster this year, starting at $2.50 in January before falling to $1.04 in March. The stock recovered to $1.75 in June but has since fallen due to its Victorian exposure, and is now at around $1.34.
In the industrial sector, the largest pure play industrial REIT is Centuria Industrial has also been volatile – in terms of share price – despite recent news that the value of its portfolio had been upgraded.
Purchasing Centuria shares would have cost $2.29 each at the end of March and $3.26 today, while the dividend yield is at 5.74 percent.
If takeovers are of interest, National Storage REIT could be one to watch.
A company called Abacus Property Group built up an 8 per cent stake in the REIT by early July and the analysts at Macquarie reportedly see a full bid on the horizon. Once again, shares have rebounded from $1.30 in March to $1.86 this week.
Overall, the REIT sector is expected to clip its dividends in the short term and the performance of the shares could be uneven, depending on the sector.
But the good news is that REITs are regarded as solid and resilient.
Ratings agency Moody’s for example, made this call in late June and said that while REITs would move into “protection mode” this year, their credit quality was good and the sector should continue to perform in the face of weak demand and slowing economic activity.
The love affair with property, it seems, could survive the pandemic.