The coronacrisis has hit the real estate sector hard. Much of the damage could prove to be permanent, as underlying trends are now accelerating and consumer behaviour could change permanently, says Michael Gobitschek, manager of the Skagen M2 fund.
‘Will we still travel as much as before the virus outbreak In two years’ time, for example? And we may be working from home a lot more’, Gobitschek asks.
Such changes could rapidly widen the gap between winners and losers in the real estate market. ‘Everything has gone down very fast, from hotels to data centres, in a massive machine-driven fire sale,’ the Swede analyses. The Skagen M2 B fund lost almost a third of its value in the market crash.
‘But since last week the market has regained some rationality, and you see a polarisation. The segments that have been hardest hit, especially shopping centres and hotels, could go down even more. But sectors that have been hit less hard are already showing a recovery,’ Gobitschek observes.
Retail: between a rock and a hard place
Already before the outbreak of the coronacrisis, Gobitschek was underweight the retail sector, but sold his last holdings in retail and hotel real estate recently. ‘We only have exposure to hotels and retail through conglomerates, for example in Japan through Mitsui Fudosan,’ he says. ‘It is now almost impossible to value retail assets, really. Retail companies cancel their contracts or stop paying rent. Many shopping centres have been financed with debt, so companies have to turn to their banks for payment deferrals, because they can’t access bond markets for financing either right now’.
Also for offices, the second largest segment in the real estate market, difficult times are ahead as an economic recession has become inevitable. Co-working space, a small but rapidly growing part of the office market, is already being hit hard.
‘We are now cautious about investing in companies that rent out to companies such as WeWork. In the worst case scenario, permanent tenants of offices also stop paying rent. We are in regular contact with landlords about this. A few weeks ago, hotel owners started receiving requests for rent deferrals or reductions, and now the same is happening to office landlords. Most have so far rejected such requests because they are waiting for government support or clarity about the validity of the tenancy agreement in this type of situation. In many cases it is not clear whether the coronavirus constitutes a force majeure’.
E-commerce
Gobitschek now sees better opportunities in logistics real estate. ‘E-commerce is receiving an enormous boost in the short term thanks to corona. Especially in areas where online shopping is less widespread, such as emerging markets [ex-China], this can also have enormous repercussions for retail real estate. That’s why, for example, we immediately sold our stakes in shopping centres in India and the Philippines when the crisis broke out,’ says Gobitschek who, despite these bright spots, is still wary of too much enthusiasm. ‘Logistics real estate will certainly be affected by the recession, and by the disruption of global supply chains caused by the virus. In order to prevent problems in the future, many companies will therefore want to spread their production across multiple locations’.
Defensive growth
Gobitschek therefore prefers less cyclical parts of the market at the moment, that are less affected by the coronavirus. ‘Sometimes they even benefit from it. Data centres, for example. Data traffic has grown enormously because many more people now work from home.’
Self-storage is another interesting segment, according to Gobitschek. ‘It grows independently of the economic cycle. Young people in particular use it a lot because they move or travel more often and need temporary storage space.’
Due to urbanisation and the trend towards smaller houses, the demand for permanent storage space by private individuals is also increasing. ‘So you see that spaces are often rented for longer periods of time, despite the short notice period of one month only.’
The trend towards more, but smaller households also means the demand for rental housing is going up structurally, especially in the cities. Gobitschek especially likes German housing companies. ‘The German rental market historically has a low correlation with GDP growth. There’s also system of rent subsidies, providing an extra layer of certainty. So these companies have stable cashflows and strong balance sheets too, and they are not immediately affected by the coronavirus.’
Investors seem to have taken note too. German rental stocks such as LEG Immobilien and Deutsche Wohnen have recovered a significant part of earlier losses recently. Gobitschek, who increased his holdings in the two companies last week on share price weakness, has profited: the fund’s value has rebounded some 15% from its low last month.