Are real estate investment trusts (REITs) dangerous right now because of the economic impacts of the coronavirus?
I’m not referring to the share price falls of REITs in general, though those have been painful. Since 21 February 2020 we’ve seen:
The Scentre Group (ASX: SCG) share price has fallen 56%.
The GPT Group (ASX: GPT) share price is down 43%.
The Stockland Corporation Ltd (ASX: SGP) share price is down 53.4%.
Even the Goodman Group (ASX: GMG) share price is down 25%.
REITs are in a bit of a difficult spot. The coronavirus is causing some sections of the economy to go into hibernation. Plenty of businesses are asking their commercial landlords for rental reductions or even rental holidays.
It’s hard for REITs because their rental income is disappearing but they still have other expenses to pay. Debt in-particular can put a business in trouble, particularly if there are covenants. Most REITs have plenty of debt. The REITs will be relying on banks to be flexible during this time.
However, I do think that Goodman is better placed than most because of its largely eCommerce tenant base.
Investors like WAM Leaders Ltd (ASX: WLE) have been selling out of REITs because of these risks.
There’s also the risk that people’s behaviours are permanently changed by this. Maybe people in office buildings decide they work better at home and they’ll let their rental contracts expire when it comes up for renewal. It would save the business a lot of rent and the staff would probably prefer it too (with no commuting and so on). Not so good for the REIT.
Scentre may have been sold off a bit too hard, there could be an opportunity there – but it’s not for me. I don’t think the average REIT is as safe in the medium-term as some may be thinking with so many tenants just deciding they’re not going to pay. I’m looking elsewhere.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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