In this video Guy Barnard, Co-Head of Global Property Equities, discusses how the team has been operating amid the coronavirus lockdown, the effects on the market so far, and explains why no significant portfolio changes have been warranted.
- While not immune to the weakness seen in other risk assets, a key supporting factor is that real estate assets are typically backed by long-term leases, and therefore tend to have much more visible and robust income streams compared to many other areas of the equity market.
- The team benefits from a pragmatic investment process, which aims to limit top-down macro risks and focuses on bottom-up stock selection. The emphasis is on companies that are benefiting from structural tailwinds such as logistics, which is being driven by the rise in ecommerce, and those areas that are more defensive such as rental residential housing. The focus on balance sheet quality in recent years also adds to the view that the portfolios are well positioned to weather current uncertainty.
Hi this is Guy Barnard. On Friday 27 March, looking to provide an update on what's been happening in the listed real estate market over the last few weeks. Before I go into that really just to highlight that as a global team we continue to be able to operate incredibly effectively despite the unusual circumstances in which we find ourselves, with clearly remote working practices that see me filming this in my son's bedroom. We as a global team have employees and portfolio managers based in Singapore, London and Chicago. We have a true global footprint, and we continue to be able to access all the systems that we need to operate effectively day to day running the strategies, and are using the many different tools we have at our disposal to communicate and operate very effectively as a global team. So our focus despite the unusual circumstances remains very much on running the strategies, our portfolios to maximise returns for our clients. Thank you for your support.
In terms of what we've seen in listed real estate markets, we've clearly suffered from a pretty dramatic drawdown in share prices and values over the last month. Initially we saw listed real estate stocks being a more defensive part of the equity market in the early stages of the sell-off. But last week we were really caught up in the concerns around debt availability and the lack of liquidity in credit markets that led to real estate stocks being impacted, even more so than the wider equity market. And I think the good news for us on that front is that the actions being taken both by central banks but also by governments have effectively got the ‘plumbing’ in the financial system working again. So we are seeing a return to more normal bond markets - spreads have widened. But the better quality companies are able to issue and we've seen several of our companies take advantage of that this week. So you know the capital markets are now functioning more normally and a lot of the de-risking and the grab for liquidity that we saw last week also seems to have washed through. So you know we have seen less volatility in share prices this week, which I think is a good sign in terms of the underlying real estate market and the impact from the fallout of the coronavirus crisis.
Clearly, we know real estate will not be immune from what is happening to global economies. But I would highlight that real estate assets are typically backed by long-term leases, typically somewhere between 5 and 7 years, often with annual escalators. So you know, the sort of path of incomes as you move forward. So despite the impact of the economic slowdown that we're going to see we do have a much more visible and robust income stream than many other areas of the equity market. That said, there will clearly be winners and losers during the current period and in our view it is those parts of the real estate market that were already under stress that are likely to be breaking first. And that to us in particular, applies to areas like retail real estate, so shopping malls where we are obviously seeing a number of malls having to shut. And retailers are therefore increasingly demanding that they do not pay rent while they can operate their store and that is going to have a very immediate impact in the earnings and likely the dividends and valuations of companies in that space. Likewise, anything related to hotels is clearly suffering very dramatically at the moment and that is likely to continue as we roll through the next few quarters. I think the good news for us is that they are parts of the market, the real estate market that we were already very cautious on so we haven't had to change our views there. We have very very little exposure before and we do not think it is right to be adding there today.
On the flip side, areas of the market that we have been more constructive on, typically those areas benefiting from structural and technological tailwinds, areas like logistics real estate - so distribution facilities used as we all shop online, these are areas that are actually likely to see an acceleration in the structural trends that were already playing out as more of us are using e-commerce increasingly, particularly in the current environment to get goods to our homes. So we remain very constructive on that part of the market. And equally there are much more defensive or many more defensive parts of the real estate market that we can target, and rental residential housing has been a big focus for us as a team, and we continue to see that as an income stream that really typically sees a pretty limited impact even during recessions. So we're confident in the earnings and dividend profile of those companies.
Overall, therefore I think our investment process has not had to change. We have a very pragmatic investment process. We try to limit top-down macro risks that we can't forecast, and focus on bottom-up stock selection to generate our alpha (excess returns). We felt we were pretty well positioned going into this in terms of companies benefiting from those structural trends that I highlighted. And overlaying that with the focus we've put on balance sheet quality in recent years, and again means that we haven't felt the need to change the portfolios significantly as we've gone through the volatility that we've seen in markets in the last few weeks. Finally, just a point on valuations, we are seeing some pretty extreme valuations.
Earlier this week we were about 6 percent off the lows we saw in terms of price (net asset value) and earnings multiples during the (global) financial crisis*. So valuations we've really not seen for more than a decade and I think that really obviously reflects the uncertainty that we all have today. And you know it is hard for us to know how long this lockdown is going to last and the exact extent of the economic damage that will come as a result. But I think I would say as a global team we are starting to see particularly with what's happening in China. You know life on the other side of lockdowns. So in China for example, we are seeing residential sales volumes are only about 30 percent down year-on-year as the economy is starting to reopen**. The pent-up demand is meaning that retail spend per customer when they are allowed back into some of the shopping malls there are actually much higher than they were pre-crisis. So you know I think there are reasons to believe that as we do come out of the other side of this, you know the real estate market will continue to function effectively and we will continue to see those parts of the market benefiting from some of those structural drivers as I outlined earlier, continuing to see robust earnings and dividend growth ahead. Thank you very much.
*Source: UBS, Refinitiv Datastream. Global real estate P/E multiple and Price/NAV as at 20 March 2020. Past performance is not an indicator of future performance.
** Source: Wind, Citi Research. China primary residential sales in 30 key cities year-to-date to 22 March 2020.