The coronavirus pandemic affected different areas of everyday life and caused significant changes in our habits and daily routine. Self-isolation in quarantine has become a required norm that is needed to prevent the spread of the disease. People started to adapt to the new conditions. Many people all over the globe now work remotely; the familiar patterns of life changed for travelers, property dealers, buyers, customers, realtors, real estate agents, and residents.
The outbreak of COVID-19 had a great impact on the economy and transactions, various spheres of business, like retail, travel and commercial real estate investing. Of course, that could not but affect the real estate investment trusts that have in possession the real properties connected with tourism, hospitality, recreation, and social interaction like gaming and entertainment. For the reason of social distancing people stopped visiting movie theatres, recreational attractions, and casinos.
Some real estate investment trusts got crushed because of the concerns of how the current circumstances will affect the behavior of their customers and the ability to finance their activity.
Two Types of REITs That Are Getting Crushed
As we stated earlier, the spheres of business that suffered the most are retail and hospitality. The reason why these two categories are the most vulnerable to the crisis is very simple. People try to avoid public places to reduce the possibility of being infected by the virus. Accordingly, they travel less and try to keep away from shopping centers with a great number of customers.
The decrease in the demand for hotels is quite explainable. Airlines and cruise lines also encountered crisis effects. Let us have a closer look at some examples in the retail sector.
- For instance, the coronavirus outbreak has a significant impact on the UK-based REIT, Intu Properties PLC [XLON:INTU]. The company is the owner of the seventeen shopping centers in the United Kingdom and ten properties in Spain. The analysis showed that the reduction in the company’s income from rent and property valuations may lead to the inability of the company to refinance its loans.
- The other company, Beter Bed Holding [XAMS:BBED], based in the Netherlands, also has suffered from the COVID-19 pandemic. Beter Bed Holding is a retailer of bedroom furniture, mattresses, and other similar products. The management of the holding expressed concerns about the decrease in consumer traffic and the doubts about the ability of the company to continue its work. There were attempts by the company to improve the situation by divesting the Company’s Matratzen Concord operations and stabilizing the operating cash flows, but these efforts were futile.
As we may observe from these two examples, the pandemic of coronavirus disease is likely to aggravate the situation for the companies that already have financial difficulties. The other retail industries that are predicted to face the challenges are food and services, and consumer goods.
Real Estate Sectors Affected by Coronavirus
We will review the sectors of the real estate industry that experienced hardship because of the coronavirus. There was no crisis like this before, so the situation can be determined as an emergency and an unprecedented case.
The spread of the pandemic may lead to the factory closings, shut down of the businesses, the damaging influence on the economic conditions all over the world. The sectors of the real estate industry that will be definitely affected by COVID-19 are hotels, restaurants, airlines, movie theatres and others. REITs influenced by the outbreak of the pandemic are regional malls, lodging, and resort. Further, we will specify the effects of the economic crisis on the separate real estate sectors.
Resorts and Lodging
This sphere of real estate was the most vulnerable to coronavirus consequences. Many people have canceled or postponed their tours and vacations, businesses moved online. The total return from the lodging and resort sector amounted to -59% year-to-date as of 16th March.
Health Care, Retail, Commercial Financing Mortgage REITs
This group of REITs has also suffered from the crisis. The result of the COVID-19 pandemic effects was the negative total returns at -40% year-to-date.
- The main problem of the retail sector is closing the stores and restaurants for customers. Public caterings and cafes provide only delivery services.
- Health Care encounters the departure of the tenants. The number of new tenants reduced significantly since the beginning of the coronavirus outbreak.
- Commercial Financing Mortgage REITs face the risks of the overdue payments of any type of commercial property that was shut down during the pandemic of the disease.
Residential, Industrial, Office, Home Financing Mortgage REITs
The following group of REITs – industrial, residential, office, diversified – faced the lesser direct effects from the crisis than the other sectors we listed above. The most part of these REITs that own houses, apartments, offices and other properties with a long period of the lease are protected from short-term negative marketing conditions due to the high quality of the real estate and good tenant base. However, the total returns in this sector amounted from – 20% to -40%.
For example, the REIT which owns the apartment with a low vacancy rate, will not face the loss of income due to the tenants who still pay for rent. Also, the office REIT with investment-grade renters is less likely for the decrease in returns.
The industrial REIT which operates the shipment of goods or logistics facilities may gain extra income because people tend to use online shopping to avoid crowded places. The demand for warehouses has increased as more people prefer to stay at home and order the goods via the Internet.
Infrastructure, Self Storage and Data Centers
Infrastrastructure sector which owns the telecommunication towers and the Data Centers sector which owns the facilities that house the Cloud Servers were the less affected group of real estate investment trusts. Moreover, the increase in the use of electronic communications by the major part of businesses to avoid face-to-face interaction caused a positive effect on these REITs sectors.
Self Storage is a perfect example of the REIT sector that may gain profit from the situation. The reason is the people’s unwillingness to go out during the pandemic of the disease – they will keep the possessions in the storage units till the end of the quarantine period.
Is It A Suitable Time to Buy?
Investors should pay attention to the categories of REITs that are facing growth. Nevertheless, the areas that are now in decline because of the crisis – hospitality and retail – would become profitable sources of income in the future. Putting money into these groups of REITs is the long-term strategy that is suitable for patient investors. If you are going to use that chance, it is important to take into account a few things:
- The financial situation in the real estate market tends to be unstable in the near future, so you need to be prepared for the sudden fall of the prices when the disease pandemic gets worse. It is difficult to make predictions and to calculate the exact time when the prices stabilize. That is why you should have patience while waiting for positive changes.
- Before investing, it is vital to make certain that the REIT you chose has solid financial footing and is able to face the difficult times. Check whether it has a strong balance sheet, low payout ratio, and other essential points concerning investing.
In conclusion, this is a good time to add hospitality and retail REITs in your investment portfolio while these sectors are in poor condition. Put aside the amount of the costs that you will need in the next several years and prepare for the changeable situation.
The Bottom Line
As we may see, the world economy is currently enduring a crisis that could not be predicted earlier. The current situation is often compared to The Great Recession of 2008, and now businesses are trying to figure out the creative ways of solving the problems that emerged all of a sudden.
Some industries are in decline because of quarantine and social distancing rules. People stopped traveling, staying in hotels, visiting shopping malls, restaurants, and other public places. Many countries have enacted severe measures – closed the borders and canceled the flights abroad. Two spheres that suffered the most are the hospitality and retail sectors.
On the contrary, the businesses that are related to the telecommunication are on the rise. The customers order the goods online instead of visiting the supermarkets to protect themselves from the disease by minimizing social interaction.
This is high time for real estate investors who rely on long-term strategies. Two categories of real estate investment trusts that are getting crushed now is a great opportunity to gain profit from a long-term perspective.
So, investing in hospitality and retail REITs is your chance to diversify the portfolio and receive significant returns in the future. The only important thing is to get prepared for the roller-coaster of the increase and decrease of the prices until the situation stabilizes. The exact calculations can be hard to make, that is why you can only on your patience.