Disclosure – Non-substantive Research
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour.
Commercial property investors have experienced a wildly volatile few months and the outlook is still extremely uncertain too, thanks to the government response to the coronavirus outbreak. Many REITs and direct property investment trusts have cut or cancelled their dividends; and the pace and scope of the lockdown lifting will affect how quickly and to what extent their rental income recovers. As a result, they sit on wide discounts to NAV. On the other hand, other areas of the property market have seen limited or no effect. Some of these alternative sectors have seen their share prices fall and rise dramatically, close to their pre-crisis valuations.
To us it seems that investors have a tough balancing act to perform. In the generalist REITs, we think the steady subsiding of the epidemic and loosening of economic restrictions mean potential opportunities in the discounts. However taking advantage of these opportunities means accepting the risk of short-term dividend cuts and plenty of uncertainty around government policy. On the other hand, some of the alternative areas offer much more secure dividends; but on a portfolio level and based on share prices they offer very little valuation cushion.
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