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Here’s why ASX REITs have been smashed in this bear market

Many ASX shares have been hit hard in this stock market crash we are living through right now.

There’s your travel shares like Qantas Airways Ltd (ASX: QAN) and Flight Centre Travel Group Ltd (ASX: FLT) that have understandably been sold off by the market due to the virtual shutdown of the global travel industry.

Then there are other ASX companies that look to be affected in a more general way – such as the ASX banks like Westpac Banking Corp (ASX: WBC) or blue-chips such as Wesfarmers Ltd (ASX: WES).

But a sector that has been sold-off in an absolutely brutal fashion has been real estate investment trusts (REITs).

How do REITs work?

REITs are companies that own mostly land/property assets. They are subject to special rules, such as a requirement to pay out 90% of their earnings as distributions, as well as a unique tax treatment.

These companies have been increasingly popular in recent years as lower interest rates have increased the appeal of income-producing shares. But this all ended in mid-February when the ASX began what is now recognised as one of the most brutal bear markets the ASX has ever seen.

Let’s look at some examples.

Scentre Group (ASX: SCG) – a REIT that owns the Westfield shopping centres in Australia and New Zealand – was trading around $4 a share in January. Today, you can pick some up for just $1.90.

Stockland Corporation Ltd (ASX: SGP) – a more diversified REIT that owns aged care homes, shopping centres and retirement villages – was asking nearly $5.50 in January. Today, SGP shares are going for $2.74.

Commercial property developer Mirvac Group (ASX: MGR) is asking $2.18 today – a far cry from the $3.50 price tag that it was commanding just 2 months ago.

You get the idea.

Why REITs have been sold-off in this ASX bear market

REITs are companies that typically perform poorly in bear markets. That’s because these are businesses that, by their nature, are usually highly leveraged. That means (like most property investors) they borrow a lot of money. This is all very well when times are good.

But when debt and credit availability start to become an issue, investors quickly lose their appetite for companies that are heavily exposed to this very issue.

What’s more, commercial properties have been especially hard hit from the economic restrictions that have been put in place as a response to the coronavirus. Shopping centres are currently ghost towns. Cinemas are closed. Retirement villages are locked down. Business parks are shuttered.

That means no rent is being paid to the owners of these properties (which are mostly REITs).

Foolish takeaway

REITs have been hard hit in this downturn for a good reason in my view – vastly reduced cash flows combined with uncertainty over when things might get better. The government is working on solutions to these problems, but for me, I’m staying away from this sector until the smoke clears.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia owns shares of Wesfarmers Limited. 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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