Amid Monday’s $137 billion sharemarket rout, property stocks fared considerably better than the broader market with investors valuing yields on real assets for their relative margin of safety.
As the market fell 7.33 per cent, the top 200 property stocks dropped 4.57 per cent.
“A port in stormy seas,” said APN Property Group portfolio manager Mark Mazzarella.
“There’s a lot of uncertainty out there. When there is indiscriminate selling across the board an asset class like the REITs would be expected to hold up. That’s what we’ve seen today.
“It’s the fact that these corporate tenants will be paying their rent [to the REITs] before they are paying their dividends to their shareholders.”
More significantly for the real estate investment trusts, yields on 10-year Australian government bonds contracted to 0.611 per cent on Monday.
At the same time, dividend yields on property stocks hit 4.87 per cent. That puts the spread on yields from risk-free money and real assets at post-GFC record levels.
For Goldman Sachs, the shift toward property is part of a defensive tilt in response to the coronavirus outbreak, with the domestic economy set to slow rapidly.
Exposure to defensives
Portfolio manager Matthew Ross said the broker was increasing its exposure to defensives by upgrading its recommended REITs to “market weight” and downgrading industrials to “underweight”.
Within the listed property sector there was a variety of performance, ranging from Scentre, the owner and manager of Westfield malls in Australia, dropping more than 7 per cent. Lendlease, the global developer and fund manager, plummeted 11.6 per cent.
But mall owners with a high proportion of their income derived from non-discretionary shopping – Charter Hall Retail REIT and Shopping Centres Australasia – escaped with much less punishment than their peers.
For veteran fund managers such as Resolution Capital’s chief investment officer Andrew Parsons those results are no surprise. Monday’s rout was a test for the varying levels of risk represented by individual REITs, according to Mr Parsons. He cautioned that the sector does not move in “lock-step” with bond yields.
“This is basically a shock to the system. Investors have been somewhat complacent about the risk,” he said.
“We’ve got to appreciate the REITs generally have leases that produce a bridge over uncertain times, but the bridge only goes so far. Some bridges are built better than others.
“Ultimately their cash flows are dependent on tenants continuing to expand. If economic growth is not running at the same rate and you’ve got some issues, that is going to affect your ability to let properties in the future and raise question marks even about tenant credit.”
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