A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
Past-year outperformance in the selected universe is 11.4% (12.9% unweighted), vs. the sector, after 5.7% outperformance over the year to our 2019 report. Despite this and previous outperformance, 5%-6% yields on sustainable dividends remain available, which we consider attractive.
The REITs’ strategies are transparent and geared to sustainable income. 42% of the UK’s top 100 quoted shares have announced dividend cuts, and this may well rise to ca.50%. At worst, 20% of the market capitalisation of the REITs listed in this report will cut 2020 dividends. For most, we believe they will rise.
Recent conditions benefit corporates, which provide personal investors with income, and such investors are even more active in the market. Search for income will not abate, and yields available here are at a premium to the wider market.
COVID-19 conditions generally play to these particular REITs’ strengths. They are not GDP-exposed, other than on the margin. Quoted sector (and banking system) gearing is lower, so REITs are far less exposed to treasury management mistakes. There is a solid base, albeit some are having to cut dividends.
Investors have rightly been sceptical of real estate during a crisis. In the April share price bounces, there was an initial differentiation favouring defensiveness. Our view is that this will continue, fuelled by the need for income in a world where long interest rates will be “lower for longer”. With the right exposure, investors have every reason to expect attractive, positive total returns.