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Value to be found in property funds

Covid-19 has obliterated the property market with tenants across all sectors struggling with cash flow problems as various measures to restrict the spread of the disease have been stepped up in most countries.

This has had a devastating effect on the rental income of property companies, which have in some cases received as little as a third of rent for the current quarter.

Rents are typically paid quarterly in advance and the next quarter rent day in the UK is due on 24 June 2020. Landlords are bracing themselves for an even worse quarter for rent collection as the lockdown in the UK continues. The situation beyond that point is far from certain, either.

Most listed companies have scrambled to secure their balance sheets, with some drawing down available funds on revolving credit facilities, and most taking extreme cost-cutting measures to see them through this period.

How long ‘this period’ will last is still unclear and therefore companies with historically low levels of debt are in a far superior position to weather the storm and be standing when we come out the other end.

There are one or two property sub-sectors that are performing well during the crisis – as detailed in QuotedData’s real estate first quarter review.

Companies that have a large majority of their income either directly or indirectly paid by the government are faring well. Assura (AGR) and Primary Health Properties (PHP) both own portfolios of GP surgeries and their income is predominantly paid by the government through the NHS.

That is the case too for the social housing companies, Civitas Social Housing (CSH) and Triple Point Social Housing REIT (SOHO), whose rents are indirectly paid by the government through housing benefit.

Discounts across the sector have widened greatly during the covid-19 pandemic, and there are a few companies looking very good value.

Listed European logistics companies are particularly interesting. Aberdeen Standard European Logistics Income (ASLI) and Tritax EuroBox (EBOX) are trading on discounts to net asst value (NAV) of 7.8% and 14.2%, as at 23 April 2020.

The underlying fundamentals of the logistics sector are strong, and especially so in Europe. Demand is being driven by an increase in online retailing and supply of modern, high-quality logistics buildings is scarce.

The upshot is significant rental growth. This has played out in the UK market over the past five years where ecommerce penetration rates have grown to be one of the highest in the world.

Most European markets are on a similar growth trajectory to that witnessed in the UK. Countries such as France and the Netherlands are expected to see a spike in demand from ecommerce-related companies, while markets like Spain, Italy and Poland are much further behind in online retail sales penetration.

The covid-19 pandemic has increased the risk of tenant default in the short-term, while also seeing a spike in demand from some business sectors such as food retailers, ecommerce and pharmaceutical.

Longer-term, the pandemic is likely to result in an acceleration in the pace of growth in ecommerce sales in the less mature markets, leading to increased demand in logistics property to support these businesses.

One of the major impacts of the pandemic has been a shift in the purchasing habits of existing and new demographic groups to online shopping as all but essential retail outlets have been lockdown in most European countries.

The increase in demand will be particularly prevalent in urban logistics, as retailers look to be located as close to the end customer as possible.

Sites suitable for logistics buildings in urban areas are about as scarce as hen’s teeth. So rental growth forecasts for urban logistics properties are especially promising.

Both ASLI and EBOX are focused on urban logistics property – with ASLI recently acquiring a property in Madrid. The discounts on offer look very attractive.

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