Asian Reits losing defensive lustre as global market rout seen stoking credit stress

Real estate investment trusts (Reits) are losing their appeal as a defensive investment amid the coronavirus pandemic that is keeping consumers at home and causing economic activity to pause.

Asian Reits have slumped by 43.8 per cent this year through March 19, according to Bloomberg data, while the MSCI Asia-Pacific Index has shed 27.8 per cent. Shares of Link Reit, Asia’s biggest real estate investment trust, have fallen 13.4 per cent in Hong Kong in the same period. Link shares rose about 1 per cent in 2019 despite the social unrest last year that forced it to temporarily close some of its shopping centres n the city amid escalating violence.

Reits have slumped along with global equity markets as the worsening Covid-19 pandemic is likely to freeze up credit markets and push some sectors to the brink, according to Principal Global Investors. Falling rents and closure of retail stores could weaken Reits’ income, hurting dividend prospects.

“Two situations when Reits’ defensive attributes do not work: credit crisis and stagflation,” said Shern Ling, the Singapore-based portfolio manager at Principal, who is part of the real estate group that manages US$80 billion in assets.

“The massive wave of government lockdowns is raising concern that many service companies such as restaurants and cinemas may face credit risk issues and credit markets have been seizing up as a result,” he said. “So over the past couple of weeks concerns over a potential credit crunch have come to the fore.”

The pandemic has infected nearly 3500,000 people worldwide and killing over 16,000 of them. It has also halted economic activity, particularly hammering the travel and hospitality industry, and severely disrupting supply chains as factories remain shut to contain the spread of the deadly disease.