April 21st 2020 – Shane Solly

Key Points

• Listed property assets have not yet fully recovered.
• Diverse impact of COVID-19 may create investment opportunities.
• A wide range of outcomes are possible, and we review current evidence on rental abatements and deferrals.
• It is reasonable to assume rentals falling by between -5% for industrial assets, through to -20% plus for secondary retail malls.
• Banks have been supportive refinancing and extending debt facilities.

More than ever, the environment highlights the need to be selective and active when investing in listed property securities. Far from being the same, the underlying basis for earnings and corporate structure in property securities is very diverse.

After being one of the best performing asset classes in 2019 (up 32.4%), New Zealand listed property securities have been one of the worst performing growth assets in 2020, down -17.5%, compared to New Zealand equities in general which are down -6.2 % (for the year to 17 April 2020). While the pricing of other listed growth assets has partially recovered from March’s liquidity-driven drop, when dysfunctional bond markets saw listed assets (including listed property) sold to meet liquidity requirements, the recovery in listed property pricing has remained relatively muted thus far. With the yield spread offered by New Zealand listed property above 10-year New Zealand Government bond yields back to Global Financial Crisis (GFC) level highs, we take a look at the current investment proposition for New Zealand listed property.

COVID-19 creates risks for listed property earnings, dividends and valuations

Listed property security Net Property Income (NPI)[1], which encapsulates rentals, vacancy and leasing incentives, is exposed to COVID-19 containment policy and the associated economic slowdown. Uncertainty about what COVID-19 containment means for the obligation, ability and willingness of tenants to pay rent has contributed to weakness in listed property stock prices. While all tenants are obliged to pay their rents, a very small number of relatively new leases in the office sector include clauses where the tenant does not have to pay rent if they are unable to access the property due to pandemic restrictions. So, the risk for property security NPI is predominantly economic.