Diamonds in the Reits rough
Real estate investment trusts’ performance has seen better days. Julian Marshall considers which sectors have problems or potential.
Real estate investment trusts have taken a fearful beating this year and few have escaped heavy losses.
The most glaring of all is General Growth Properties, a highly leveraged retail mall operator in the US that suffered the ignominy of being ejected from the S&P 500 in November after losing 99% of its value this year.
General Growth was particularly hard hit as it was so vulnerable to the disaster zone of leverage.
But there are still some places where Reits are relatively, and it is important to stress that word, good performers.
Healthcare Reits, with exposure to the niche market of hospitals and medical office buildings, are one such sector. The reason for this relatively robust performance is obvious: even in a recession, people still get sick and need care. On top of that, in the US, the ageing baby boomers are putting ever more workload on the healthcare infrastructure.
"It will be somewhat of a recession-proof asset," says CB Richard Ellis. "Its demand enables it to withstand these economic downturns better than other types of investment property, which are more volatile."
But what of retail property? General Growth is the most high profile example of what can go wrong. Yet analysts such as John Perry of Deutsche Bank say the conventional wisdom is that shopping-mall Reits could hold up better than some.
But the outlook for retail markets remains bleak. Against that backdrop, in the UK, which is forecast to suffer a harder, deeper and longer recession than some of its neighbours, the biggest inner city mall in Europe has just opened.
Westfield London Centre opened at the end of October, amid the worst trading conditions retailers have faced in 20 years.
Frank Lowry, Westfield chairman, told the crowds that he was not worried by the timing. "I have 50 years’ experience in shopping centres, and business cycles come and go and my experience tells me that this cycle shall pass."
Boris Johnson, mayor of London, was also confident of its future. "With unemployment rising in the UK, is it right that Westfield make an investment of £1.6 billion [$2.48 billion] and create 7,000 jobs?"
He said the centre would be here after "this recession, the next recession, and the one after that".
There was certainly a buzz on opening day. Customers arrived more than 90 minutes before the doors opened for the first time at the 43-acre complex, which has 265 shops and 50 cafés.
The UK government is hoping its cut in value-added tax will help get the economy moving again, by getting money rolling back in to the shops. Certainly, owners of retail Reits will be hoping this is true.
The reality is belts are being tightened and budgets trimmed across UK Reits. Investors remain positive about the long-term prospects for those UK Reits with superior underlying portfolios.
Such companies as Hammerson, Land Securities and British Land are praised for their good record of underlying property performance and their comparatively strong balance sheets.
Hammerson announced in mid-November that it is halting all new developments, including retail schemes in Leeds and Sheffield, until the end of 2009, because of the harsh economic climate. John Richards, chief executive, said it was not at all difficult to make the decision to delay developments.
Hammerson is cutting costs by £3 million, involving some job losses. The rise in construction and financing costs, coupled with lack of backing from anchor tenants, made the belt-tightening inevitable. It is going ahead with developments in London and Aberdeen that were already under way and Richards remains bullish on the outlook.
British Land meanwhile announced that the value of its assets had fallen by £2.8 billion in 18 months. Chris Gibson-Smith, new executive chairman following chief executive Stephen Hester’s departure for Royal Bank of Scotland, said heightened stress in credit markets had affected investor sentiment towards all asset classes. British Land has more exposure to out-of-town retail warehouse parks and some analysts fear that it could risk breaching covenants in the next two years. This came on the heels of more dispiriting news for the sector when Land Securities reported a 20% drop in its NAV.
But investors still looking for Reits opportunities could adopt a more esoteric approach.
VinReit, is a three-year-old Reit focused on the wine industry and it has been making some big investments this year. A subsidiary of Entertainment Properties Trust of Kansas City, it has a portfolio of 1,590 acres of vineyards and 10 wineries.
There’s no guarantee that vineyards are any safer an investment than regular real estate but at least investing in them offers some potentially tasty fringe benefits.