REITs dull as hotels empty
A drastic fall in hotel occupancy rates has made investment in real estate investment trusts (REITs) and property funds less attractive compared with the hype seen last year, with selective investments suggested in this asset class.
REITs, property funds and infrastructure funds had garnered popularity among yield seekers and investors during the past two years as they have a hybrid characteristic between fixed-income securities and equity along with offering dividends on returns generated from property rent.
Last year, REITs in Asia-Pacific raised a record US$14 billion, surpassing the previous record of $13.8 billion in 2013, according to JLL.
Matters have taken a turn as businesses across the spectrum struggle to cope with a declining revenue stream against the backdrop of the pandemic.
The hospitality and property sectors are among the hardest hit as the lower occupancy rate has taken a large bite out of their earnings.
The impact from the outbreak is more severe than the Severe Acute Respiratory Syndrome (SARS) epidemic in 2002-03 and the avian influenza in 2017, said an executive at a hotel that operates a REIT and property fund, who spoke on condition of anonymity.
"The hotel occupancy rate during those crises declined to 30%, but recovered at a fast pace after the end of the outbreak. Today's occupancy rate is zero or under 5%," said the source.
"With zero or near 0% occupancy rate, there is a probability that these funds would not pay dividends if fundholders comply."
Most hotels in Thailand are likely to close temporarily during the outbreak as the occupancy rate plunges to near zero in at-risk areas, with few lodgings operating at a profit, according to the Thai Hotels Association.
The two largest hotel operators in Thailand, Minor Hotels and Asset World Corp (AWC), have temporarily closed hotels in Bangkok and virus-hit areas to prevent the disease from spreading.
During the tourism slowdown, many hoteliers have to enforce leave without pay to maintain their businesses. However, more than 2,000 employees at six AWC-operated hotels in Bangkok, which have been temporarily closed, continue to receive salary and wage during the closure.
Industry property managers from two companies, AIM REIT and WHA REIT, who manage industrial fund properties, said the direct impact on this industry has yet to transpire, but monitoring has been set up.
According to FIN App, an analytic Thai-registered mutual fund application, the prices of REITs and property funds have declined by 12-33% from the end of last year, excluding the United Japan Real Estate Securities fund.
"Yields on these funds are returning to 7-9% due to a drop in market prices, considered to be attractive compared with last year's yields of 4-6%," said Win Phromphaet, chief investment officer at Principal Asset Management. Investors should invest in this asset class based on a selective strategy, said Mr Win.
"I suggest selecting funds that invest in businesses that will see limited impact from the pandemic, such as logistics, data centres and infrastructure, while avoiding the high-impact segments such as retail, hotels and conference centres as dividends could decline or be put off," he said.
"Most property funds and REITs in Thailand are clustered in the retail, hotel, office rental and industrial segments. We found few REITs in the logistics and data centre businesses in Singapore."