Global Industrial And New Economy REITs Benefited From The Pandemic, Whereas Global Traditional REITs Underperformed

Aug. 18, 2020 11:35 AM ETVNQ, RQI, REM, IYR, AWP, RNP, RFI, VNQI, SRET, XLRE, MORT, NRO, IGR, KBWY, SCHH, FREL, JRI, REET, SRVR, JRS, REZ, DRN, ICF, RWR, RWX, USRT, WPS, NETL, DRV, SRS, URE, SEVN, IFGL, RWO, ROOF, WTRE, INDS, REK, IFEU, FRI, PSR, GQRE, NURE, DTRE, ASRAX, BBRE, PPTY, IARAX, VRAI, HAUZ, RRGIX2 Comments
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Summary

  • Global REITs market has declined by 4.13% year-to-date according to Invbots Global REITs Index, mainly due to the pandemic and the concern on the global recession.
  • Both the US and Singapore REITs markets have recovered strongly given the diversified market structure and the strong focus on new economy REITs sectors.
  • The Hong Kong REITs market performs the worst because of its highly concentrated market structure and strong emphasis on legacy Retail REITs.
  • While REITs are generally perceived as a traditional industry, new economy REITs growth potential is under-estimated by many investors. New economy REITs have achieved positive returns year-to-date.
  • Recent performances of REITs markets are highly dependent on the concentration of Industrial REITs (Out-performers), Retail and Hotel & Resort REITs (Under-performers).

*All Data as at 8/8/2020

Following our previous article (REITs Is The Most Consistent Asset Class Providing The Best Return Over The Past 15 Years), which explains why REITs are an ideal asset class for portfolio diversification. In this article, we further analyze our 8 focusing REITs markets in terms of market concentration and conduct a comprehensive sector analysis to identify the key characteristics and the investment-worthy sectors of each of the markets.

Global REITs market has declined by 4.13% year-to-date according to Invbots Global REITs Index, mainly due to pandemic and concern on the global recession.

Table 1: Global REITs Index (6-Month)

Source: REITbots.com

Both the US and Singapore REITs markets have recovered strongly given the diversified market structure and the strong focus on new economy REITs sectors, whereas the Hong Kong REITs market performs the worst because of its highly concentrated market structure and strong emphasis on legacy Retail REITs.

Table 2: Global REITs Indices

Source: REITbots.com

According to our proprietary REIT Indices, the Global REITs market has rebounded around 12.6% in the past 3 months after suffering a 34% decline in late-March due to the pandemic. Among all eight countries under our coverage, the US REITs market has shown the strongest rebound at 15% in the past 3 months, followed by Australia at 11.3% and Singapore 11.1%. While all countries have shown positive returns in the past three months, Hong Kong is the only REITs market that declined by 8.2% in the past 3 months as the Hong Kong equity market suffered not only from the pandemic negative impact but also from negative investment sentiment from China-US trade tensions. Among the top three outperforming countries in the past 3 months, the U.S. and Singapore REITs have performed strongly partly due to the diversified market structure of both markets. The sector concentrations of these two markets are also key factors contributing to their out-performances, which will be discussed in this article.

While REITs are generally perceived as a traditional industry, new economy REITs growth potential is under-estimated by many investors. New economy REITs including Industrial REITs, Data Center and Tower REITs have achieved positive returns year-to-date.

The global spread of COVID-19 has led to extreme performance among various REITs sectors. While the traditional economy, e.g. Residential, Office, Retail REITs, has been harmed significantly, new economy markets, such as Industrial, Tower, Data Center REITs, are growing at unprecedented paces. In fact, the impacts on different REITs sectors brought by the pandemic vary a lot as well.

Global Industry Classification Standard (GICS)

We have adopted the Global Industry Classification Standard (GICS) as the core sector classification.

Table 3: Real Estate Sub-Industry - Global Industry Classification Standard (GICS)

Source: GICS

Industrial & Specialized REITs as Out-performers; Retail & Hotel REITs as Under-performers

Table 4 (A): Sector Performance from the Global Perspective

Source: REITbots.com

Table 4 (B): US Specialized REITs - Storage, Data Center and Cell Tower Sector Performance

Source: Thomson Reuters Eikon, analyzed by Invbots

The GICS definitions are the key to evaluate sector performance, which is measured by the market-capitalization-weighted-return of REITs in the same sector. As aforementioned, the E-Commerce business and data demand have been booming due to social-distancing and work-from-home (WFH) around the world, leading to strong demand for warehouse/logistics services as well as data center demand. As such, Data Center, Cell Tower and Storage properties, which are classified as Specialized REITs under GICS standard, have been outperforming the traditional sectors over the last few months, providing 3-month returns of +16.92%, +9.26% and +17.27% respectively. Industrial REITs have enjoyed strong growth as well. By contrast, businesses like retailing and tourism have come to a halt under the influence of the pandemic. As a result, Retail and Hotel & Resort REITs have experienced a slump in the stock prices with declines of more than 30% compared to the pre-pandemic level.

Sector Analysis by Country

Table 5: Global REITs Market Summary

In the following section, we analyze the market concentration of the eight REITs markets covered to understand the relationship between sector concentration and the respective market performance.

Australia REITs Market: Concentrated in Retail, Industrial & Diversified REITs

Table 6 (A): Australia REITs - Market Share of Top Market-Capitalization Companies

Source: REITbots.com

Table 6 (B): Australia REITs - Sector Distribution of Top 10 Companies

Source: REITbots.com

Table 6 (C): Australia REITs - Sector Distribution of Top 30 Companies

Source: REITbots.com

Currently, the top 10 and top 30 companies account for 76.7% and almost 100% of the whole Australia REITs market in terms of market capitalization, implying that Australia is a highly concentrated REITs market. From the sector perspective, the top 10 REITs mainly consist of Retail REITs (30.78%), Industrial REITs (30.61%) and Diversified REITs (29.08%), which is more or less the same as the composition of sectors among the top 30 companies, with main focus on these three sectors.

Table 6 (D): Australia REITs - Top 10 Players in terms of Market Share

Source: REITbots.com

Although Australia is a highly concentrated market, the largest market capitalization REIT in Australia - Goodman Group [GMG.AU], is a top 5 Industrial REIT in the world. Thus, Australia REITs are benefited by Industrial REITs rally as this sector is a pandemic beneficiary. The top 10 companies also include Unibail-Rodamco-Westfield SE (OTCPK:UNBLF) [URW.AU] and Scentre Group (OTCPK:STGPF) [SCG.AU], two large market-cap Retail REITs.

Table 6 (E): Australia REITs - AU REIT Index & Major Sector Index

Source: REITbots.com

Following the global sector trend, Industrial REITs have been outperforming the overall Australian REITs market. Diversified and Retail REITs are underperforming and showing weak signs of rebound. With market concentration more inclined to Diversified and Retail REITs, the AU REIT Index is still struggling to recover to the pre-pandemic level.

Canada REITs Market: Highly Concentrated in Retail and Residential REITs

Table 7 (A): Canada REITs - Market Share of Top Market-Capitalization Companies

Source: REITbots.com

Table 7 (B): Canada REITs - Sector Distribution of Top 10 Companies

Source: REITbots.com

Table 7 (C): Canada REITs - Sector Distribution of Top 30 Companies

Source: REITbots.com

Currently, the top 10 and top 30 companies account for 66.9% and 97.9% of the whole Canadian market in terms of market capitalization. From the sector perspective, Retail REITs and Residential REITs account for half of the market in terms of market capitalization. Office REITs and Industrial REITs combine for around a quarter of the whole market.

Table 7 (D): Canada REITs - Top 10 Players in terms of Market Share

Source: REITbots.com

The top 3 companies by market capitalization are Canadian Apartment Properties (OTC:CDPYF) ([CAR.CA], Residential REITs), Allied Properties (APYRF) ([AP.CA], Office REITs) and RioCan (OTCPK:RIOCF) ([REI.CA], Retail REITs). Among the top 10 REITs, four of them are Retail REITs, two of them are Residential REITs and others are Office, Industrial, Diversified and Healthcare REITs.

Table 7 (E): Canada REITs - CA REIT Index & Major Sector Index

Source: REITbots.com

After the pandemic outbreak in March, the CA REITs Index is now around 25% below the pre-pandemic level. The underlying reasons can be attributed to the slow recovery of Residential REITs and Retail REITs, which are the major sectors in Canada.

EURO REITs Market: Diluted & Diversified Market, Focus on Diversified, Office & Retail REITs

Table 8 (A): EURO REITs - Market Share of Top Market-Capitalization Companies

Source: REITbots.com

Table 8 (B): EURO REITs - Sector Distribution of Top 10 Companies

Source: REITbots.com

Table 8 (C): EURO REITs - Sector Distribution of Top 30 Companies

Source: REITbots.com

The EU REITs market is a diluted and diversified one. Currently, the top 10 and top 30 companies account for 57.3% and 87.9% of the whole EU market in terms of market capitalization. From the sector perspective, Diversified REITs, Office REITs and Retail REITs represent the majority of the EU REITs market.

Table 8 (D): EURO REITs - Top 10 Players in terms of Market Share

Source: REITbots.com

The top 3 REITs by market capitalization are Gecina SA (OTCPK:GECFF) ([GFC.EU], Diversified REITs), Covivio SA (OTCPK:GSEFF) ([COV.EU], Office REITs) and Unibail-Rodamco-Westfield SE ([URW.EU], Retail REITs). The top 10 REITs composition, similar to the whole EU market, highly focus on Diversified REITs, Office REITs and Retail REITs.

Table 8 (E): EURO REITs - EU REIT Index & Major Sector Index

Source: REITbots.com

The recovery pace of the EU REIT Index has been in line with that of Diversified, Retail and Office REITs. Regarding the recent performance, Diversified REITs have shown a strong rebound while Office REITs have been recovering slowly. However, Retail REITs are once again declining after rebounding in early-June as the COVID-19 situation remains tough in Europe.

Hong Kong REITs Market: Retail & Office REITs- Small & Highly Concentrated Market

Table 9 (A): Hong Kong REITs - Market Share of Top Market-Capitalization Companies

Source: REITbots.com

Table 9 (B): Hong Kong REITs - Sector Distribution of Top 10 Companies

Source: REITbots.com

Hong Kong REITs is a small and highly concentrated market. Currently, the top 10 REITs account for almost 100% of the whole Hong Kong market in terms of market capitalization. From the sector perspective, Retail REITs are dominant in the market. Other sectors such as Office REITs, Diversified REITs and Hotel & Resort REITs account for less than one-third of the market.

Table 9 (C): Hong Kong REITs - Top 10 Players in terms of Market Share

Source: REITbots.com

Retail REITs is the major sector in Hong Kong as Link REIT [823.HK], a top 3 market-cap in global Retail REITs, is representing more than 60% of the HK REITs market capitalization. Fortune REIT [778.HK] is also a top 3 player with business mainly focused on Retail REITs. For the second-largest sector (Office REITs), the key players are Champion REIT [2778.HK], Spring REIT [1426.HK] and Prosperity REIT [808.HK].

Table 9 (D): Hong Kong REITs - HK REIT Index & Major Sector Index

Source: REITbots.com

Hong Kong has been the worst-performing REITs market in the world over the past three months compared to its global peers. Given that almost 70% of market share belongs to Link REIT, the movement of the HK REIT Index has been closely correlated to the Retail REITs Index and both have dropped sharply over the past 6 months, as retailing businesses struggle amid COVID-19 and the great reduction in the number of tourists.

Japan REITs Market: Office, Industrial & Diversified REITs - Diluted Market

Table 10 (A): Japan REITs - Market Share of Top Market-Capitalization Companies

Source: REITbots.com

Table 10 (B): Japan REITs - Sector Distribution of Top 10 Companies

Source: REITbots.com

Table 10 (C): Japan REITs - Sector Distribution of Top 30 Companies

Source: REITbots.com

Japan REITs is a diluted market with a focus on some traditional sectors. Currently, the top 10 and the top 30 companies account for 45.4% and 81.4% of the whole Japan REITs market in terms of market capitalization. From the sector perspective, Office REITs, Industrial REITs and Diversified REITS are the major sectors, representing over 75% of the total market share, while Residential REITs is also a notable sector in Japan.

Table 10 (D): Japan REITs - Top 10 Players in terms of Market Share

Source: REITbots.com

For the top 10 Japan REITs market players composition, Industrial REITs and Office REITs are of equal significance with three companies from both sectors on the list. The top 3 companies are Nippon Prologis REIT Inc. (OTCPK:NPONF) ([3283.JP], Industrial REITs), Nippon Building Fund Inc. (OTCPK:NBFJF) ([8951.JP], Office REITs) and Japan Real Estate Investment Corp. (OTCPK:JREIF) ([8952.JP], Office REITs). Compared to other markets, the market capitalization difference among the top 10 REITs in Japan is smaller as none of the REITs accounts for more than 10% of the total market capitalization of the whole Japan REITs market.

Table 10 (E): Japan REITs - JP REIT Index & Major Sector Index

Source: REITbots.com

The Industrial REITs not only recovered to the pre-pandemic level but also started to perform strongly since late-June and continued to outperform the other sectors. Residential REITs are also showing positive signs of recovery. Meanwhile, Diversified REITs and Office REITs are still way below the early-2020 level as the Japanese government has asked the business community to ensure that each company has 70% or more employees work from home. The JP REIT Index has entered into a consolidation zone since July as around half of the market capitalization belongs to Diversified REITs and Office REITs.

Singapore REITs Market: Industrial, Retail & Office - Led by Traditional Sectors

Table 11 (A): Singapore REITs - Market Share of Top Market-Capitalization Companies

Source: REITbots.com

Table 11 (B): Singapore REITs - Sector Distribution of Top 10 Companies

Source: REITbots.com

Table 11 (C): Singapore REITs - Sector Distribution of Top 30 Companies

Source: REITbots.com

Singapore REITs market is a market led by traditional sectors. Currently, the top 10 and the top 30 companies account for 68.7% and 98.5% of the whole Singapore market in terms of market capitalization. From the sector perspective, traditional sectors, namely Industrial REITs, Retail REITs and Office REITs, represent over 75% of the total market capitalization.

Table 11 (D): Singapore REITs - Top 10 Players in terms of Market Capitalization

Source: REITbots.com

In Singapore, Industrial REITs are the dominant sector in the top 10 market players composition. All of the top 3 REITs belong to Industrial REITs sectors, i.e. Ascendas REIT (OTCPK:ACDSF) [AEMN.SG], Mapletree Logistics Trust (OTCPK:MAPGF) [MAPL.SG] and Mapletree Industrial Trust (OTCPK:MAPIF) [MAPI.SG]. These three REITs alone combine for 30% of the total market capitalization in Singapore.

Table 11 (E): Singapore REITs - SG REIT Index & Major Sector Index

Source: REITbots.com

The Singapore REITs market has been outperforming the global REITs market with the current SG REIT Index being only 8% below the pre-pandemic level. The major reason would be its high concentration in the industrial sector while the Industrial REITs have obtained a strong rebound since April and are now having consistent growth. However, Office REITs and Retail REITs are still on the downtrend despite the rebound in mid-June.

United Kingdom REITs Market: Medium Concentration with Diversified Sectors

Table 12 (A): UK REITs - Market Share of Top Market-Capitalization Companies

Source: REITbots.com

Table 12 (B): UK REITs - Sector Distribution of Top 10 Companies

Source: REITbots.com

Table 12 (C): UK REITs - Sector Distribution of Top 30 Companies

Source: REITbots.com

The UK REITs market is a relatively concentrated market with diversified sectors. Currently, the top 10 and the top 30 companies account for 67.3% and 94.7% of the whole UK market in terms of market capitalization. From the sector perspective, Industrial REITs account for a quarter of the total market. Half of the market share is shared among Diversified REITs, Office REITs and Residential REITs, while the remaining quarter belongs to other sectors.

Table 12 (D): UK REITs - Top 10 Players in terms of Market Share

Source: REITbots.com

In the UK, SEGRO PLC (OTCPK:SEGXF) ([SGRO.GB], Industrial REITs) is the dominant player in the REITs market with market capitalization over 20% of the total market. The rest of the top 10 REITs sector composition is rather diversified, covering almost all of the classified sectors based on the GICS Standard. For instance, Land Securities Group PLC (OTCPK:LSGOF) ([LAND.GB], Diversified REITs), Unite Group PLC ([UTG.GB], Residential REITs), British Land Company PLC (OTCPK:BTLCY) ([BLND.GB], Retail REITs), Derwent London PLC (OTCPK:DWVYF) ([DLN.GB], Office REITs) and Assura PLC (OTCPK:ARSSF) ([AGRP.GB], Healthcare REITs) are the leaders of their respective sectors in terms of market capitalization.

Table 12 (E): UK REITs - UK REIT Index & Major Sector Index

Source: REITbots.com

The UK REITs market has been recovering steadily over the past few months and is currently trading at 15% below the pre-pandemic level. Industrial REITs have been outperforming and Healthcare REITs are making a comeback again after the decline in mid-July. Meanwhile, Diversified REITs and Residential REITs are showing positive signs of recovery recently but full recoveries in the short term are very unlikely.

United States REITs Market: Specialized, Residential & Industrial REITs - Large & Diluted Market

Table 13 (A): US REITs - Market Share of Top Market-Capitalization Companies

Source: REITbots.com

Table 13 (B): US REITs - Sector Distribution of Top 10 Companies

Source: REITbots.com

Table 13 (C): US REITs - Sector Distribution of Top 30 Companies

Source: REITbots.com

The US REITs market is the largest and diversified market with a focus on Specialized REITs, Residential REITs and Industrial REITs. Currently, the top 10 and the top 30 companies account for 45.1% and 70.4% of the whole UK market in terms of market capitalization. From the sector perspective, Specialized REITs account for more than half of the market shares of the US REITs market. In fact, Specialized REITs cover multiple new economies but sizable sub-sectors, e.g. cell tower, data center. Other than Specialized REITs, Residential and Industrial REITs combine for around a quarter of the whole market.

Table 13 (D): US REITs - Top 10 Players in terms of Market Share

Source: REITbots.com

The top 10 market player composition is dominated by Specialized REITs with 6 out of 10 belong to the sector. The top 3 companies in market capitalization are American Tower Corp. ((AMT), Specialized REITs), Prologis Inc. ((PLD), Industrial REITs) and Crown Castle International Corp. ((CCI), Specialized REITs).

Table 13 (E): Global REITs - Top 10 Players in terms of Market Share

Source: REITbots.com

The above table shows the 10 largest REITs across the globe. In terms of geographical distribution, the largest REITs in this world are overwhelmingly concentrated in the U.S. market, with 9 out of 10 REITs come from the U.S. market.

Table 13 (F): US REITs - US REIT Index & Major Sector Index

Source: REITbots.com

The U.S. REITs market has declined the least over the past 6 months with the current US REIT Index only 5% below the pre-pandemic level. This can be attributed to the fact that the U.S. REITs market is highly concentrated in Specialized REITs and Industrial REITs, which are the out-performers in the 6-month period as referred to the sector performance table.

Recent performances of REITs markets are highly dependent on the concentration of Industrial REITs (Out-performers), Retail REITs and Hotel & Resort REITs (Under-performers).

Table 14: Global REITs Market Performance Table

The above performance table reveals that among most of the regions observed, Industrial REITs are the out-performers while Retail and Hotel & Resorts REITs are the underperformers. As the U.S., Singapore and Australia REITs markets are highly concentrated on Industrial REITs, they have become the global outperformers. Meanwhile, Hong Kong and the EU markets mainly focus on Retail and Office REITs, and are therefore under-performing the global market.

This article was written by

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Disclosure: I am/we are long PLD, ACDSF, MAPIF, SEGXF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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