Societal changes due to COVID-19 will be felt by listed REITs, says S&P

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E-commerce and remote working may be a good thing for consumers, but not for real estate investment trusts (REITs) and their investors.

In 2020, all but one of the 45 listed REITs on the ASX has declined. The odd one out is agricultural-focused Rural Funds Group (ASX:RFF) and its gain is only 2 per cent.

Yesterday ratings agency S&P Global Ratings assigned a negative outlook to 27 per cent of Australian and New Zealand listed REITs and said more could follow in the longer term.

The government has placed a six-month moratorium on evictions for struggling tenants and S&P analyst Craig Parker predicts this will hit shopping centre and commercial landlords the hardest.

“Shopping centre landlords will be hit hardest among rated Australian and New Zealand REITs as retailers demand rent waivers, deferrals, or concessions to ride out a recession due to the COVID-19 pandemic,” Parker said.

“For commercial landlords, the hit could extend beyond the lockdown period if the economic downturn exacerbates tenant distress and limits asset sales or other capital raisings.”

But in the longer term, the shift to shopping online and working from home could be a bigger hit to commercial landlords because of the reduced demand for office space.

However, S&P said it expects most REITs have either strong or adequate liquidity to absorb the shock for at least 12 months.

The ratings agency credits the more disciplined approach to liquidity management they’ve taken since the GFC.

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