The WFH reality-check for REITs

-- | 28/05/2020

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Lex Hall: Welcome to another edition of "Ask the Expert." Today, I'm joined by Morningstar equity analyst Brian Han. We're going to talk about COVID-19, some of the big changes that it's having on certain sectors in the economy, namely, real estate, media and gaming; we're going to talk about uncertainty in particular.

Brian, nice to see you again albeit in two dimensions.

Brian Han: Thanks, Lex. Good to see you.

Hall: That's been one of the big changes, hasn't it, working from home? That's really had a big effect on how we live our lives and how companies are thinking about the future. I want to touch on that since we are talking about work working from home and what that means for retail landlords and more importantly, office landlords, real estate investment trusts. What does that mean first of all for office supply and demand do you think?

Han: Yeah. Perhaps I can preface that by saying that, look, I don't think there will be many structural changes that's going to persist after this covid is all over. Most things will revert back to normal. The only question is, how long will it take to go back to that normality. But I think working from home, I believe, is a phenomenon that will stay with us for a long time even after all this is over. And the reason why I say that is because as we talk to each other right now working from home I think we have the infrastructure, we have the technology and most importantly, I think we have the willingness on the part of the employers and white-collar employees to work from home.

So, if you accept our view, in the future a big proportion of white-collar employees maybe working from home few days a week, then that has some implications for office-centric retail investment trusts. So, we're talking about trusts such as Cromwell, Mirvac, Dexus. So, these are office trusts that have more than 60 per cent of their assets invested in office towers. And as our property analyst Alex Prineas has consistently pointed out, we've had a very extended period of escalating rents in the office space over the past 10 years. So, I think that will come to an end and where it settles is questionable. But the whole point is, if you accept that this working-from-home phenomenon is not a flash in the pan, then you have to be very wary about these office-centric trusts and you have to be very wary about the margin of safety that you demand in the stock price to invest in these trusts.

Hall: All right. So, restrictions are sort of starting to ease and we're seeing, you and I are both seeing more and more people on the street, on public transport and people want to return to their old habits. Shopping malls and shopping landlords on the other hand are by no means dead or at a much risk, would you argue?

Han: Yeah, that's where I have a personal opinion that I think shopping malls will come back in force. I think they will continue to thrive. The reason why I say that is I think it's one of the last frontiers where mass audience is gathered for social reasons, for many reasons apart from shopping. Now, when you look at it, I think the tenants are itching to get back there, to get closer to the customers. The customers are definitely itching to get back there. I mean, on the weekend I was out there and there wasn't much social distancing going on. There were a lot of people even with a third of the shops closed. So, you can imagine when all the shops are open how chock-full it will be.

Hall: Yeah.

Han: So, tenants are willing to be there, consumers are willing to be there. Landlords are certainly itching for everybody to get back there. It's this pandemic that will reset the rent while this pandemic is going on. But from that reset level as recovery happens, I am pretty confident that everything will revert back to normal over time.

Hall: OK.

Han: So, that's why we are actually quite – what I'm actually quite optimistic about retail-centric REITs, for example trusts such as Scentre, which is basically your Westfield shopping malls and Vicinity, which owns among many things the Chadstone mall in Melbourne. And those two are particularly showing some good margin of safety in terms of the discount that they are trading at in terms of Alex Prineas' valuation.

This report appeared on 2021 Morningstar Australasia Pty Limited

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