REITs can be a safer way to invest in volatile market
REITs have defensive characteristics because a large part of their total return typically comes from dividends, and these dividends are derived from multi-year leases, which are not immediately impacted by short-term equity market turmoil.
The most defensive REIT sector has traditionally been the high-quality retail sector, and in particular REITs which have a strong exposure to quality grocery/drug store-anchored community retail centres - centres focusing on so-called "necessity retail".
However, during the last downturn REIT stock performance was highly correlated to bank stock performance, and of course in the last few days bank stocks, in America in particular, have been battered.
That said, today's REITs generally have stronger balance sheets than prior to the GFC. The question of refinancing availability should be a less pressing question than in the past, when high leverage, falling asset values and the use of short-term financing created a perfect storm for some REITs.
The current situation obviously raises questions about future occupier demand, property occupancy and rent growth.
If investors believe modest growth is possible over the next few years in the major Western property markets, the ability to buy REITs at prices that have now been pushed below NAV by the current crisis may prove to be an attractive and somewhat defensive investment option.
Martin Lamb is head of property, Asia-Pacific, for Russell Investments.
